Why is Government So Expensive?

By Michael Shires

Associate Professor of Public Policy at Pepperdine University

Tue, July 22nd, 2008

California and its local governments are facing tough choices this fiscal year—basically cut services to balance the budget or raise taxes dramatically to pay for it. But why?

It turns out that revenue declines are only a small part of the problem. The real answer lies in the fact that the cost of government rises each year without any change in services—it comes in the form of salary increases and benefit increases.

These amounts are largely negotiated in secret and buried in public employee agreements that rarely if ever see the light of day. Does this mean that public employees do not deserve raises? Absolutely not—they should and do receive annual increases.

Most public employees automatically receive a three to five percent “step” increase each year. The raises we hear discussed in the limited public releases about these negotiations are increases on top of these basic increases -- the so–called COLA or cost of living adjustment.

For example, in Vallejo, a city which recently filed for bankruptcy protection, some unions were scheduled for 21 percent COLA increases over three years—on top of their regular step increases of 3-5 percent.

These kinds of increases are unheard of in the private sector (try asking your boss for a 12 percent guaranteed raise for each of the next three years), but have become ubiquitous in California’s state and local governments.

And this is just the salary portion of the conversation. Add on top of it full medical benefits for the rest of their lives, extensive overtime and an amazingly generous retirement system and you have a public finance system that is destined for bankruptcy -- a destination rapidly approaching for the state and many local communities.

While the result is shocking, the real failure is the secretive process that lead to it. The total lack of public information about these negotiation processes prevents the public from holding their elected officials accountable. Add in the fact that many of these very officials are elected due to major investments by these very employee unions (a topic for a later day), and you have a recipe for fiscal disaster. And taxpayers across the state are about to taste the fruits of that recipe.

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Pension Funds are Collection Agencies

Submitted by Visitor (not verified) on Wed, 07/23/2008 - 23:32.

This post and the astute follow on comment say almost all that needs to be said about this travesty of democracy - where two Americas now exist; private sector taxpayers who get social security and medicare when they retire in their 60's (if they're lucky), and public "servants" who get retirement benefits several times as generous, begining in when they retire in their 50's. One additional point, however. Not only do the public employee unions - using taxpayers money that is almost always involuntarily collected from public employee paychecks - control elections with literally billions of dollars they throw into campaigns of compliant politicians. At the other end of the equation are the massive, union controlled pension funds. The debts that cities and counties owe to the pension funds are by far the biggest liabilities on their balance sheets. If they don't pay, the collection agents show up. Try staring down a collection agent from CALPRS if you are a city manager and the union pension fund is owed money? This is more than a gross inequity because taxpayers in the private sector get virtually nothing compared to these "servants" in the public sector. This is more than a travesty of democracy that these unions control our elections and bankrupt our local and state governments. It is also a looming fiscal crisis that will make the housing bubble and resultant financial meltdown look like a cakewalk. Every city and county in the nation is flirting with bankruptcy, and consequently these pension funds are flirting with bankruptcy. They control literally trillions of dollars, and when they collapse, they will take a lot of people and economic sectors down with them. If we end up in a depression as a result, why be surprised. When unions controlled the US auto industry, they saddled it with pension debt that still leaves them crippled. Now they control our government, and the stakes are higher still. Union power in the public sector needs to be broken, and public servants need to come down to earth. The idea that a fireman or a cop or a teacher or a nurse or some bureaucrat should be making $250,000 per year, or more - just apply the present value of their retirement benefits to the years they work, and believe me, they are making this much money each year - is disgusting. Try getting a job in the globalized private sector! Break union power in the public sector. There is no comparison between unions in the private sector, who have to be reasonable or they will kill the company, and unions in the public sector, who can control the levers of government and delay the fiscal consequences of their greed until it is far, far more serious. If unions power in the public sector isn't curbed, it will destroy the U.S. economy, and these unions and the public "servants" who acted with such dispicable greed will be to blame.

Only part of the story...

Submitted by Jaek Muran (not verified) on Wed, 07/23/2008 - 08:25.

Other components of the problem:

** Firefighter and police unions use the salary negotiations in one city as the new bar in the neighboring city. As a result, the pay, benefits, and special working conditions spiral up. Some cities actually have automatic adjustments to reflect neighboring city pay levels.

** Sometimes the pay increases are hidden in special pays -- certification pay, longevity pay, bi-lingual pay, scholastic pay, uniform pay ... -- that are not "visible" to the general public on salary/pay tables. These special pays range anywhere from 3 to 7% of base pay and they are all "PERS-able", meaning they count towards retirement pay calculations. Although they were constructed to derive certain HR objectives, they eventually reach a point where the majority of personnel earn them. This results as a hidden pay bump.

** In some cities, the pay and benefits are max'd out, so the contract negotiations start getting into the realm of dreamland. Recently, one police union is negotiating added on-the-clock time for 15 minutes at the start and end of shift, to don, police gear... bulletproof jacket and utility belt with gun, taser, radio and cuffs...

** Firefighter and police unions have the largest treasuries and are politically active. As a result, anyone running for political office needs their support -- endorsement, money and labor pool to get elected. The candidate will not be elected again in they turn down any salary or benefit increase. Such campaign "bribery" ensures election and raises.

** Politically weak politicians statewide opened flood gates. Gray Davis/Democratic legislature approval of 3% per year PERS rate for the CA State Correctional Officers and CHP, set the standard for all local government firefighters and police to get 90% retirement payouts.

** When PERS was flush with money in the 90's, cities negotiated away 50-50 split of contributions to retirement. Consequently, most cities now pay the entire contribution.

** When firefighters and police gets raises, the Police and Fire Chief get raises. When the chiefs get raises, the City Manager gets a raise. There is no forcing function in the entire system, other than taxpayers, that have any incentive to control the process, and they are shut out by closed council sessions and budget manipulations.

** Salaries, especially public safety salaries absorb a relatively enormous part of the budget. As a result of these locked in personnel cost spirals, other operating cost and infrastructure replacement cost have spiraled in the opposite direction. The current results are bankruptcy or massive infrastructure bond issues.

thanx for addressing the subject... Jaek

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