California, look to Wisconsin

Now that three California cities have declared bankruptcy, perhaps it’s time to consider the lessons of Wisconsin.

One of the reasons Wisconsin Democrats couldn’t unseat Republican Gov. Scott Walker in the state’s recall election was that his challenger exemplified how Walker’s narrowing of collective bargaining privileges for government workers benefited the state.

As mayor of Milwaukee, Tom Barrett had relied on Walker’s reforms to balance his city’s budget. And Barrett wasn’t alone among Wisconsin officials. Walker comfortably defeated Barrett in large part because in the 11 months that the governor’s reforms were in effect, Wisconsinites got a good glimpse of how they worked, even in Milwaukee, where the savings allowed government to remain solvent and avoid widespread layoffs.

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When Walker introduced his so-called budget repair bill in February 2011, he argued that the biggest beneficiaries of his plan would be cities, towns and school districts, which would gain the flexibility to cut costs without having to negotiate every change in compensation or work rules with local unions. His legislation specifically eliminated collective bargaining by government workers for benefits and required greater contributions from them toward pensions.

How local officials employed those changes to cut costs proved revealing. The state’s teachers union, Wisconsinites learned, had used its power to collectively bargain for healthcare benefits to demand that local school districts provide coverage through a nonprofit insurer affiliated with the union. Once the state ended bargaining on healthcare, school boards began competitively bidding out their health insurance.

By the opening of the new school year in September, just two months after the budget bill went into effect, 23 districts had rebid their contracts, saving $16 million, or an average of $211 per student. The MacIver Institute, a Madison-based think tank, estimated that if all the state’s districts were able to negotiate similar deals once their contracts with the union-affiliated insurer expire, schools could save $186 million.

As mayor of Milwaukee, Barrett employed Walker’s reforms before he knew he’d be facing the governor in the recall election. In mid-August 2011, barely a month after the changes went into effect, the Milwaukee Journal Sentinel reported that the city would save as much as $36 million in its next budget from “healthcare benefit changes it didn’t have to negotiate with unions” as a result of the new state legislation. When asked whether Walker’s reforms should be credited for the savings, Barrett brushed aside the question and asserted that virtually everyone was in favor of having workers contribute more to their healthcare.

Local governments that couldn’t immediately employ Walker’s savings faced dire consequences. The Milwaukee public school system, for example, had negotiated a new contract with its teachers union right before Walker’s budget reform bill was passed. In the wake of Walker’s bill, the school system went to the union and tried to work out concessions in line with the savings that would have been possible under the new legislation. But the union refused to negotiate, and two days later the district laid off 519 employees, including 334 teachers. The school system had estimated that if employees agreed to contribute 5.8% of their salaries toward pensions, as mandated by the new state law, that would have saved $20 million, enough to avoid 200 teacher layoffs.

Walker has said he was motivated in part because the cost of employing a public sector worker in Wisconsin (and many other places) has soared thanks to rising pension and health costs in particular. Without the flexibility to move quickly to control those costs, local governments faced a long-term budget pinch in which employee compensation squeezes out other spending and drives taxes higher.

Californians should understand those fiscal pressures. Average annual pay for a local government employee in the state rose by 60%, to $61,185 (excluding benefits), between 1999 and 2008, according to the Little Hoover Commission on California State Government Organization and Economy. That’s about 70% more than the increase in private sector wages in the state over the same period. Average pay for cops and firefighters climbed 69%, to $89,056, again excluding benefits, in the same period.

Benefit costs have soared even more than wages. The annual cost of funding pensions in California’s 20 largest municipalities has grown from $1.3 billion in 1999 to $5.1 billion last year, according to a study by Stanford University professor Joe Nation. That’s an annual growth rate of better than 11%.

Faced with such increases, municipalities in California haven’t had nearly the flexibility to mend their budgets that officials in Wisconsin have.

In San Jose, where the average cost of employing a city worker, including benefits, has soared to an extraordinary $142,000 annually, Mayor Chuck Reed had to fight long and hard for a ballot measure to reduce pension costs that was passed by voters in June. In the three years before the vote, the city had to lay off about 2,000 employees and cut back on parks, libraries and other services.

In Stockton, which declared bankruptcy in June, for every dollar the city spent on salaries, it spent another dollar on employee benefits. Facing unsustainable employee costs and an intransigent police union that was demanding the city pay retired officers about $300,000 for unused sick and vacation time, Stockton cut a quarter of its public safety forces and still couldn’t meet its obligations.

No wonder that state and local government employment slumped nearly 6% in California from the beginning of 2009 through the close of 2011. That’s nearly double the rate of decline among state and municipal workers nationwide in the same period.

Without pension reform in Sacramento, and with local contracts that make it impossible to cut costs without concessions from unions, cities and school districts in the Golden State are left with few good choices to balance their budgets. That was pretty much the case in Wisconsin too until Scott Walker came along.

Steven Malanga is senior editor of the Manhattan Institute’s City Journal.