Budget Ignores Public Employee Reform

JUNE 29, 2010

Commentary

By LANNY EBENSTEIN

The state budget approved on Tuesday is the wrong way forward for the state of California. Though this budget does not rely upon new or extended general taxes, it would cut many vital services. This is neither desirable nor sustainable.

The 2011-12 budget relies upon rosy projections of future income. If these do not materialize, further cuts would come into effect. Schools would be particularly hard hit.

There is an alternative to continually decreased public services together with continually higher general taxes. This is to pay public sector employees fair wages and compensation, particularly pensions. The reason for the California budget crisis, which extends from the state to virtually every county, city, school district and special district in the state, is excessive compensation of public sector employees. If public sector employees were compensated comparably to employees in the private sector, the state’s general taxes could be cut and its services increased. It’s a matter of political will.

A recent Reason-Rupe poll shows that the public’s mood is changing on the vital question of public sector collective bargaining. According to the poll, 37 percent of Americans now support the curtailment of public sector collective bargaining versus 43 percent who oppose. However, if public sector employees are not considered in polling, then 45 percent of all Americans favor curtailing collective bargaining for public sector employees compared to 38 percent who do not.

To curtail public sector collective bargaining has the support already of the plurality of Americans, not including public sector workers. What even a few months ago seemed a virtually utopian position — to end public sector collective bargaining — is now mainstream.

As the pension and general government compensation debacle grows even worse in the coming months and years, the possibility for fundamental reform will exist. The approach of simply presuming that tax revenue will grow as services are slashed is not viable. If the economy now does not do as well as expected — much less if it actually declines — the budget of almost every government agency in the state would be hammered.

This would be the case especially if the stock market declines and actuarial rates of return are recalculated. The 7.75 percent to 8 percent annual rates of return projected in California public sector pension funds are much too high. If calculated at 4 percent, then the state and local governments would owe an additional $40 billion per year or more to pension systems.

The right way forward is:

• Abolish public sector collective bargaining;

• Tax public sector pensions above $100,000 per year more;

• Raise the retirement age of public sector employees.

There is a real alternative to continually higher taxes and devastated public services at the state and local levels. It is to reform public sector collective bargaining and pensions dramatically.

Public sector collective bargaining has been a disaster. It was opposed by Franklin Roosevelt and long-time AFL-CIO President George Meany. The entity being bargained with is not a private interest but the public itself. The best approach is to allow government agencies, subject to existing civil service laws, to set the wages, salaries, working conditions and benefits, including pensions, of their employees, as employers in the private sector do.

This would be the best approach to enable each of the thousands of government agencies in the state to take the appropriate individual actions that will solve their fiscal difficulties.

Public sector unions would continue to exist. They are a protected free association under the United States Constitution, and could continue to advocate on working conditions and other aspects of public policy. But public sector unions should no longer have the ability to bargain on behalf of their members with public agencies.

Excessive public sector union power has increased the size and scope of government greatly. Excessive public sector pensions, those of more than $100,000 per year, should be taxed more. These are often windfall pensions that individuals didn’t count on, as pension amounts were raised, much retroactively, in recent years. It doesn’t make sense to give, as the state of California will in a few years, pay 100,000 pensions of $100,000 per year or more as public services are decimated on an annual basis.

That would be more than $10 billion to 100,000 pensioners, compared to a state budget of less than $90 billion at this time. A progressive income tax on public sector pensions above $100,000 per year should be implemented.

According to Robert Feckner, the long-time president of the California Public Employees’ Retirement System: “I think where you’re looking at the $100,000 club, it’s something that needs to be looked at. I don’t think the fund was set up to look at someone retiring with that kind of benefit” (Sacramento Bee, 11/23/2009).

It also is essential to raise public sector retirement ages. There is no reason, just because someone works for government, that he or she should be able to retire a decade — or more — earlier than everyone else. Even in the case of public safety, the retirement age should be raised, if not as much as other government workers.

What government does is important and vital. It is for this reason vital that public sector collective bargaining and pensions are reformed fundamentally now.

Lanny Ebenstein, Ph.D., is a lecturer in the Economics Department at the University of California, Santa Barbara, and is president of the California Center for Public Policy.