Will 2010 be the year states say enough is enough?

F. Vincent Vernuccio Director of Labor Policy, Mackinac Center for Public Policy
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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.

California, whose public pensions are underfunded by $535 billion, may be in the worst shape in the nation.  Gov. Arnold Schwarzenegger is finally starting to draw the line. In June he pledged he would not sign a budget that did not include an overhaul of the state’s failing public pension system.

New York Governor David Paterson spent the week before the Fourth of July vetoing 6,900 spending items included in the state’s $136 billion budget. Patterson told reporters:

Rather than act in the interests of the people of New York State, [legislators] have engaged in legislation that is in self-interest and presented us with a series of bills that have the same gimmicks, chicanery and avoidant conduct that has characterized fiscal management in this state for far too long.

One vetoed item was a normally routine extension of a law that would allow new police and firefighters to join the older, more generous public employee pension system. “Police officers and firefighters have earned the state’s gratitude, and they should be well compensated upon retirement,” Paterson said. “But that does not mean we can continue the present, unaffordable pension system.”

Paterson has plenty to complain about. On July 1, The New York Times reported that dozens of bills in the New York state budget “sweetened” the pensions of public workers. The Times used an analysis by the Citizen Budget Commission, which said that at least 50 such bills, “are being considered in the Legislature. Some are claimed by sponsors to have no fiscal impact, despite conferring more costly benefits on dozens, hundreds or thousands of people.”

Elizabeth Lynam, Citizen Budget Commission’s deputy research director, told the Times:

The Legislature just authorized delaying payments to the pension system because they are unaffordable … For them to be making pensions more expensive at the same time is completely irrational.

On both sides of the isle, policy makers are waking up to the fact that states simply cannot afford to compensate public employees like they once did. Irresponsible promises made and burdens shifted to future generations have come due. Legislators and governors of both parties must now make difficult decisions of how to reign in past agreements.

And it shouldn’t be just until the current economic gloom lifts. In the future, no matter how well or poorly the economy performs; lawmakers must not forget the lessons of 2010. Government worker compensation must be realistic and fully funded.

F. Vincent Vernuccio is a former official in the Department of Labor and an adjunct scholar at the Competitive Enterprise Institute