Will 2010 be the year states say enough is enough?

For decades, government employees at every level have received steadily increasing compensation—including salary, pensions, and health care benefits—thanks to the political clout of public employee unions. Yet that era may be coming to a close. Years of profligacy have led to the vast majority of public pensions now being significantly underfunded. State and local governments can no longer avoid the problem. For that reason, 2010 may be remembered as a turning point for government employee compensation.

According to a report by the Pew Center on the States, state and local governments only have on hand $2.35 trillion to pay for $3.25 trillion in health and retirement benefits promised to current and retired workers. Pew used the latest numbers available, from fiscal year 2008. With the current economic crisis, the gap is probably even worse today.

Today’s taxpayers could be on the hook for the actions of politicians in past generations, who, when confronted with ever increasing union demands, kicked the can down the road rather than make hard choices.  Choices are simple but unpalatable: cut generous benefits to a key voting block or impose a greater tax burden on citizens. Finally, citizens may get the upper hand.

Last week, New Jersey took a major step when Governor Chris Christie signed a $29.4 billion budget that slashes spending by 2.2 percent (8.6 percent if federal spending is included) from former Governor Jon Corzine’s final budget. The budget is the smallest in New Jersey in five years.

“This budget deals responsibly with the fiscal nightmare we inherited and makes the tough and necessary choices to restore fiscal sanity to our state and begin fundamental reform,” Christie said

The budget takes particular aim at the public employee unions that have been bleeding the state dry.  In retirement benefits alone, New Jersey owes an estimated $46 billion in pension contributions and $56 billion in health care obligations.

The governor made good on his promise to cut school aid by $820 million. In April Christie gave certain school districts an extension to receive additional state aid in exchange for teacher wage freezes and increased benefit contributions. This promise, along with efforts to link pay to performance, has made Christie and other political leaders in the state targets of public unions, including the powerful New Jersey Educators Association.

It’s not just Republicans who see the need to control spending. Stephen M. Sweeney, formerly a top official in New Jersey’s ironworkers union, is now president of the New Jersey State Senate. Sweeney, a Democrat, laments the harsh reality that the state cannot afford the lavish benefits of the public sector unions saying, “At some point, you reach the limit of your ability to pay.”

He cites the example of how four retiring police officers cost a New Jersey town almost $1 million for unused sick days and vacation time.

And New Jersey is not alone.