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How states and the federal government can learn from Wisconsin's example
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Governor Scott Walker
Wisconsin Gov. Scott Walker’s victory in the June 5 recall election is a clear blow to public-sector unions in his state. But have the governor’s efforts to rein in generous public-sector compensation been enough? And can reductions in excessive compensation for government employees spread to other states, and perhaps to our nation’s capital?
Let’s hope so. This ought to mark the beginning of a real revolution to get our city, state and federal books in order. That doesn’t require eviscerating public sector pension, pay packages and job protections – simply bringing them a little closer in line with what stressed private sector workers expect in the 21st century.
The failed recall of Walker effectively seals in place reforms passed in March 2011, which included significant increases in employee contributions toward pensions and health insurance.
But even following these reforms, Wisconsin workers are far from underpaid. In a recent research paper published by the American Enterprise Institute, we showed that Wisconsin state employees today receive total wages and benefits around 20% higher than private sector workers with similar levels of education and experience. Many local government employees in Wisconsin do even better.
As in other states, the Wisconsin pay premium is driven by generous fringe benefits. Perhaps this is because salaries are easy for taxpayers to measure and compare, while fringe benefits are opaque and difficult to place a value on.
But even after the Walker reforms, the health package for state employees is twice as generous as the private sector average, while public workers’ traditional defined benefit pension plans are still over four times more generous than what the typical private sector 401(k) plan provides.
Wisconsin is hardly the worst offender in this regard. Many states pay an even larger bonus to government workers. In New York State, for instance, public workers who retired in 2011 after full careers working for the state received average pensions topping $50,000, equal to 73% of final salary.
In addition, these retirees will typically receive around $22,000 per year each in Social Security benefits, providing a total income in retirement exceeding what they received while working. Few private sector workers do nearly as well.
The same patterns hold at the federal level. Federal employee salaries are at least equal to those paid in the private sector – but they receive much more generous benefits.
A March 2012 report by the Congressional Budget Office concluded that the average federal worker receives almost 50% more paid time off than similar private sector workers. Moreover, federal workers’ retirement package combines a traditional defined benefit pension with a defined contribution pension that provides an employer match, along with retiree health care that in total is 2.7 times more generous than benefits paid by large private sector firms.
Beyond that, nearly all public employees – federal, state and local – have significantly greater job security than private workers, even after controlling for skill differences between workers in each sector.
While state and local governments have faced some layoffs – in part due to unions’ unwillingness to negotiate on labor costs – these job cuts have been smaller than in the private sector. And federal workers have seen practically no net layoffs at all.
Moreover, all public employees receive far greater protections against dismissals, making firing for cause so arduous that many governments rarely even bother. The so-called “rubber rooms” in New York City, which kept poorly-performing or misbehaving teachers on the payroll but away from kids, were only the starkest evidence of the job protections public employees enjoy.
Clearly, much remains to be done, both in Wisconsin and in cities and states around the country. Passing more laws like Wisconsin’s is one route, but hardly a sure one. Ohio Gov. John Kasich, for instance, passed similar reforms only to see them repealed via a 2011 voter referendum.
Here are several other ways in which reformers might bring the public and private sector closer.
One approach is to bypass union power in city councils and state legislatures using ballot initiatives sponsored by reformers. On the same day as Wisconsin’s recall election, San Jose voters passed a referendum that reduces pension benefits and increases employee contributions for newly-hired workers. San Diego’s Proposition B went further, limiting pension benefits for current employees and shifting new hires to a defined contribution 401(k)-style plan.
Both initiatives passed by two-to-one margins. Ballot initiatives, where available, may be the best path to immediate reform.
An alternate approach is to weaken unions’ ability to obstruct reforms. A number of states, including Wisconsin, have made union membership – and, more importantly, the payment of union dues – voluntary for public employees. Prior to these reforms, deduction of union dues from worker paychecks was automatic. Using these funds, unions become the largest campaign contributors in many states.
Without automatic dues collection, membership in the Wisconsin chapter of the American Federation of State, County and Municipal Employees fell from almost 63,000 in March 2011 to less than 29,000 in February 2012.
And this is hardly an extreme case. The Colorado Association of Public Employees saw a 70% membership decline after the state made membership voluntary in 2001. Indiana stopped automatic dues collection in 2005 and public-sector unions lost 90% of their members. Utah saw a similar decline in teacher union membership in 2001, and a 1992 reform in Washington state saw the share of dues-payers fall from 82% to just 11%.
Automatically collected dues are used for political organizing against reform-minded candidates. And it is clear that many public workers simply do not want to be part of a union when given the choice. Voluntary union dues are not merely the right thing for public employees, but the right thing for taxpayers as well.
A third path to reform is demanding more accurate and transparent accounting practices. Accounting rules for state and local government pensions understate their true liabilities and encourage these plans to take greater investment risks, putting government budget and the economy at risk.
Under current rules, pensions may value – or “discount” – their benefit obligations using the interest rate they expect to return on their investments. The problem is that public pension benefits are guaranteed by law, while the plans’ investments – which often include stocks, private equity, and hedge funds – are risky.
“Public employee unions will fight further reforms, but recent events suggest they will lose when taxpayers are given a chance to weigh in responsible reforms.” -Andrew Biggs and Jason Richwine
Economists everywhere, from academia to the Congressional Budget Office to the Federal Reserve, agree that risk-adjusted measures of pension obligations better capture their full cost, which includes taxpayer bailouts if pension investments don’t meet expected returns. Using these measures, public pensions around the country are not underfunded by “only” $700 billion as fund managers claim, but by somewhere north of $4 trillion.
Proper accounting would also make the generosity of public pensions more transparent. For example, the new benefits accruing each year under the Wisconsin Retirement System cost more than two-and-a-half times what the system estimates. And the benefit to a typical worker in the Wisconsin system is roughly equivalent to having a 401(k) with an employer contribution of 24% of salary each year.
Understanding the true costs of public pensions through proper financial accounting could spur elected officials to take the need for reform seriously.
Across the country, federal, state and local governments pay out almost $1.5 trillion in salaries and benefits each year. If government employees are reaping the same average 20% premium we found in Wisconsin, taxpayers could save roughly $300 billion annually simply by returning government salaries and benefits to private sector levels.
Public employee unions will fight further reforms, but recent events suggest they will lose when taxpayers are given a chance to weigh in responsible reforms.
Andrew Biggs is a resident scholar at the AEI. Jason Richwine is a senior policy analyst at the Heritage Foundation.
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