States, cities brace for higher wage costs after hiring binge

State and local governments boosted wages, offered bonuses, advertised hundreds of miles away and sweetened benefits to fill jobs lost to the pandemic. Now analysts say it's time to tally the bill.

Buoyed by tax revenue and federal stimulus funds, municipalities across the U.S. didn't hold back when replenishing their workforce. But all the new hiring will come at some cost as wage pressures mount and concerns about the economy linger.  

"Following 21 straight months of positive job growth in the sector, we're watching to see budget impacts of this successful hiring campaign," said Geoff Buswick, managing director and sector lead for state governments at S&P Global Ratings.

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The public job market was one of the last to recover from the pandemic when compared to the private sector. Almost four years after the COVID-19 coronavirus shut schools, closed theaters, grounded flights and filled hospitals, public sector payrolls topped pre-pandemic highs at the end of December, according to seasonally-adjusted data from the U.S. Bureau of Labor Statistics. 

"It took a big run-up in hiring throughout most of 2023 to complete that restoration," said Justin Marlowe, director of the Center for Municipal Finance at the University of Chicago, in an email. In contrast, "it took 15 years for state/local government to recover from the Great Recession," he added. 

Last month, state government payrolls totaled 5.3 million, surpassing the high reached in February 2020. Meanwhile, local governments employed 14.7 million, slightly above the total posted in March 2020. 

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Reaching those levels meant doling out a lot cash and getting creative. Florida said it paid out $22.5 million in bonus money to attract new police officer recruits from out of state, and succeeded in attracting more than 900 officers since 2022. Last year, the San Francisco Police Department went on a recruiting mission to four Texas universities. And one small northern Minnesota city offered new hires and existing police officers free canoes plus paddles and life jackets, a package worth $4,000, in an effort to attract and retain staff.  

"Wage and benefit enhancements have been common in an effort to fill slow-to-hire positions, notably, in public safety, education, nursing and social work," said S&P's Buswick.

Dan Kowalski, an analyst at Moody's Investors Service, said he expects government wage growth to remain around 4% to 5% even as inflation this year drops below 3% and private sector wage growth slows to around 3% by the end of 2024.

"State and local governments have generally been able to absorb rising wage pressures," said Eric Kim, head of state government ratings at Fitch Ratings, in an email, adding that a sizable amount of their budgets go to labor costs. "However, contractually bargained multi-year wage increases could be a problem if slowing consumer spending and related tax revenue is worse than expected."