LOS ANGELES — Mayor Antonio Villaraigosa once organized for a teacher’s union here, and later ran a branch of the American Federation of Government Employees. That makes him an unlikely advocate for cutting the benefits of the city’s workers.
But with the city facing a budget deficit that could drain its reserves by summer, Mayor Villaraigosa wants to re-open contract talks with 45,000 cops, firefighters, librarians and other city employees in hopes of persuading them to contribute more to their pensions and health-care costs. His deputy chief of staff, Matt Szabo, puts it bluntly: “Unions have priced themselves out of a job.”
Nationwide, politicians looking for budget cuts are confronting politically powerful unions in a major assault on state and local government employees, who represent 15% of U.S. workers and organized labor’s biggest stronghold.
In Memphis, the city’s health-care committee recently recommended raising current and retired employees’ health-insurance premiums by as much as 15%. And Toledo’s city council last week wrung $3.1 million in concessions from its firefighters’ union as part of a measure to close its budget gap.
Similar things are happening at the state level. Over the past two years, 17 states have cut benefits for employees or increased the amount that individuals must contribute to their pension plans. Three of those states — Kentucky, Texas and Vermont — did both, according to the Pew Center on the States, a public-policy think tank.
At the heart of this fight is an unbalanced equation: The weak economy is shrinking cities’ and states’ tax income even as their pension and health-care costs have soared. As a result, some governments are diverting money from services to cover employee benefits, or raising taxes and fees. That doesn’t sit well with some taxpayers — many frustrated at seeing their own benefits being cut by private-sector employers. So governments are seeking cuts in union benefits long considered sacrosanct.
This has its risks. Public-employee unions are among the biggest political spenders, and their members vote in droves. Also, cutting benefits could make it tougher to keep the best employees at a time when public services are in high demand.
It represents a defining moment for public employees and their unions. Local government is by far the most unionized sector of the work force, and among the few places left where blue-collar workers can retire with lifetime pensions. In 2009, the nation’s 7.9 million unionized government workers eclipsed the number of private-sector union members for the first time since the Labor Department began keeping track in 1983.
“What comes out of all these negotiations will set the tone for public employees for a while,” says Ken Jacobs of the Center for Labor Research and Education at University of California, Berkeley.
In New Jersey, outrage over state deficits helped Republican Chris Christie defeat incumbent Democrat Jon Corzine last November. A few weeks after Mr. Christie’s victory, a Quinnipiac University poll found that three-fourths of state voters supported a wage freeze for state workers, and 61% favored layoffs. Last month, Gov. Christie signed a set of bills that would, among other things, cut pension benefits for future employees.
Public-employee unions argue that it’s unfair to penalize them for a financial crisis that isn’t their fault. They say cities and states are opportunistically taking advantage of a short-term crisis to gut benefit plans in place for decades.
The rise in public-sector benefits has attracted the ire of citizens like Paul Nelson, a semi-retired investor in Upper Saddle River, N.J. Mr. Nelson, 59 years old, has a son at Northern Highlands Regional High School, where the principal says the school may have to cut teachers and increase class size. “Most public employees have retirement and health-care plans that private-sector employees can only dream of,” says Mr. Nelson.
Virtually all full-time state- and local-government employees have access to retirement plans, and most are employer-funded. By contrast, only three-quarters of full-time workers in the private sector have access to retirement benefits.
It’s tough to compare government pay to private-sector pay because many government jobs — firefighters, police officers — don’t have private counterparts. But, on average, government workers make more in wages and benefits. In December, state and local governments spent an average of $39.60 in wages and benefits per hour worked on their employees, versus an average $27.42 for private employers, according to the Labor Department.
Disparities like these give politicians ammunition for cost-cutting. “Public-employee benefits have to be reined in,” says Andrew Koenig, a Republican state representative in Missouri.
Mr. Koenig is sponsoring a bill in his state that, over the next several decades, would shift away from a defined-benefit plan, where an employer puts as much money into a pension fund as needed to cover future retirement benefits. It would be replaced with a 401(k)-type of plan (similar to those now in place at many private-sector employers) where workers absorb the market’s ups and downs.
Some argue that just because corporations have trimmed employee benefits doesn’t mean the government should as well. “There has been an attack on American private-sector workers and benefits, with 401(k)s replacing traditional pensions,” says Teresa Ghilarducci a professor at the New School for Social Research in New York City, “and they have failed” at providing retirement security.
At the root of governments’ fiscal problems today are promises made in past decades. As a group, state and local governments have promised an estimated $3.35 trillion in pension and health-care benefits to be paid over the next three decades, but are estimated to have just 70% of the money to cover those payments, according to the Pew Center on the States. Pension and health costs can easily consume 20% of city and state budgets.
California offers a view of the fallout. The state’s largest pension fund, the California Public Employees’ Retirement System, known as Calpers, is estimated to be only 57% to 65% funded. Having suffered investment losses in recent years, the state has had to dip deeper into its revenues to make up the funding gap. Last year, a budget impasse forced the state to issue IOUs for taxpayer refunds, among other things.
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