Public sector pay reform awaits Treasury - Oceanic Blue Group Co.,Ltd

Hidden inside the state budget that received final Knesset approval last month is a quiet revolution in the public sector pay structure. Today, the pay slips of hundreds of thousands of employees are a patchwork of supplements and archaic components accumulated over the years that have made compensation in the public sector cumbersome and rigid. The reform introduced by the Ministry of Finance Salary and Employment Agreements Department into the Economic Arrangements Law accompanying the budget lays the groundwork for the abolition of historical distortions in pay.

The first thing to be dealt with will be vehicle expense rebates, which in the current model give an incentive to employees to travel to work in private cars. About 80% of employees in government ministries and 40% of local authority employees are currently entitled to a monthly allowance that averages about NIS 2,500. Those who do not run a car and prefer to travel to work by the more environmentally friendly means of public transport or bicycle are in effect fined over NIS 2,000 out of their monthly salaries.

For years, the Ministry of Finance has sought abolish this discrimination in pay, which contributes to worsening traffic congestion and crowded parking lots, but up to now the attempts have been halted by an actuarial problem. Abolition of the problematic practice and its replacement by something more intelligent is liable to create a large debt to employees with unfunded pensions. If this salary component is not conditional on owning a car but is instead given to everyone, employees with unfunded pensions paid out of the state budget will be able to demand that it should be recognized in their salaries for the purposes of calculating their pensions (rather than being classed as an expense refund). The change will affect only those retiring in the future, and not current pensioners.

The reform will make it possible to detach new pay conditions from pension payments and to award additional pay to employees without entering a huge commitment. It will now be possible to determine that certain pay components will not be included in the determining salary for the purposes of calculating pensions. The Ministry of Finance and the Histadrut (General Federation of Labor in Israel) will be able to reach agreements of this kind only in relation to new salary components. If car expenses are converted to a fixed salary component, it will be possible to exclude it from the calculation of unfunded pensions.

A study by the chief economist at the Ministry of Finance in 2021 found that the vehicle expense component in public sector salaries led to a situation in which 52% of households in which there was someone employed in the public sector maintained two cars, versus 27.7% of households in which there were no public sector employees, and to an 18% rise in the probability that travel to work would be by private car. The study covered only the approximately 370,000 people who work in government ministries, who account for about half of those employed in the public sector. A report by the Knesset Research and Information Center states that vehicle expense rebates total NIS 17.5 billion annually.

Opposing approaches

In previous years, the Histadrut opposed similar initiatives, but it has now lent its support in principle, which is why the reform passed without protests against it. But how exactly will it be implemented? On that, there are differences of opinion.

In the Histadrut's view, turning the car expense supplement into a kind of general travel supplement means that anyone who up to now would have been entitled to a car expense rebate but did not have a car or a driving license, and so did not receive the money, should now be treated equally to their colleagues and receive a pay supplement of NIS 2,000-3,000 monthly. There are not many such people in the public sector, but enough to cause a rise in salary costs of several hundred million shekels.

The Ministry of Finance sees things differently. In its view, those who have not received a vehicle supplement up to now will not necessarily receive the money under the new regime. The ministry seeks to establish the basis created by the reform without raising costs by more than a few million shekels. It says that even today, each state agency receives an allocation for vehicle expense rebates, so that not all employees can exercise their entitlements, and it does not want to exceed that threshold.

The Ministry of Finance has in mind a mechanism whereby compensation will include a travel component calculated according to the distance each employee travels to work, irrespective of the means of transport. Current allowances will not be affected; even an employee who lives close to work will not have the amount he or she receives for travel reduced. This could impose additional costs on the state budget, through the raising of payments to employees who travel a long way to work. This is one of the details of the plan that have not yet been resolved.

In the longer term, investment in the reform could pay off, if it really does cut the number of working hours lost because of traffic congestion and reduces air pollution, factors that the Ministry of Finance calculates cost the economy billions of shekels in lost product. This is without taking into account the tens of thousands of parking spaces that the state subsidizes or provides itself.

So what needs to happen now for the change in the model to be put into practice? In principle, what is required is a collective agreement between the Ministry of Finance and the Histadrut. But this need not necessarily be a comprehensive agreement covering the whole public service. Now that the legal basis is in place, the Ministry of Finance could wait for an opportune moment and choose individual ministries and authorities suitable for pilot schemes.

When will it happen? At present, Ministry of Finance Director of Wages and Worker Agreements Efi Malchin and Histadrut chairperson Arnon Bar-David are mainly busy finalizing the details of the framework agreement for raising public sector salaries. Only after that agreement is signed will the sides be free to put the reform into high gear.

Then there is the budget question. The 2023-2024 budget does not include finance for paying the equivalent of the vehicle allowance to everyone. The Histadrut believes that the funds could come from the budgets of the Ministry of Environmental Protection, the Ministry of Transport, and perhaps other social budgets, on the grounds that the declared aim of the reform is to remove thousands of vehicles from the roads.

The real solution that could bridge the gap between the views of the Histadrut and the Ministry of Finance lies in the "petty cash" set aside in the framework agreement for solving problems. The cash is not so petty, and is estimated at NIS 2.5-3 billion over five years. When the Ministry of Finance and the Histadrut get around to starting pilot schemes for the abolition of the existing car expenses mechanism, this money could finance a compromise between the Histadrut and its demand for hundreds of millions of shekels in extra pay, and the desire of the Ministry of Finance to avoid raising expenses.

Published by Globes, Israel business news - en.globes.co.il - on June 7, 2023.

Opposing approaches