California’s state and local politicians are failing their fiduciary responsibility to the taxpayers. As the taxpayers’ agents, California’s politicians should be establishing compensation policies that are generous enough to attract and retain the right people, but not so generous that government workers earn a substantial premium compared to their private sector counterparts.
However, California’s state and local government workers are receiving a total compensation package that is 30 percent higher than what government employees could earn in the private sector according to a 2011 study by Andrew Biggs and Jason Richwine. This compensation premium is driven by overly generous benefits. And, there are consequences to squandering taxpayers’ money. Unaffordable compensation benefits (especially the promised retirement benefits) are a pivotal factor behind the state’s persistent budget crises and the bankruptcy threats looming over local governments throughout California including San Diego, Stockton, and Fresno.
The excessive compensation problem is the logical result of California’s policies. Changing these policies will help restore balance to the state and local compensation practices and help resolve the budget crises afflicting the state. Some necessary policy changes must focus on broader issues, such as addressing the problem of special interest money having undue influence over political decisions, which Proposition 32 would address. Other necessary policy changes specifically focus on compensation practices. These policy changes can be categorized as causal policies and specific compensation practices.
Starting with the causal policies, California encourages public sector collective bargaining and a high rate of government unionization. These practices tilt the salary negotiation in favor of state and local employees and ultimately enable the specific unaffordable compensation practices. As noted by James Sherk at the Center for Data Analysis at the Heritage Foundation, the fact that unions and union tactics are incompatible with public sector work was once widely understood including by President Franklin Delano Roosevelt and the labor movement itself.
Citing Franklin Roosevelt on the right for public workers (in this case federal workers) to strike he wrote the following to the President of the National Federation of Federal Employees; “Since their own services have to do with the functioning of the Government, a strike of public employees manifests nothing less than an intent on their part to prevent or obstruct the operations of Government until their demands are satisfied. Such action, looking toward the paralysis of Government by those who have sworn to support it, is unthinkable and intolerable.”
The evidence substantiates Roosevelt’s concerns. Comparing California’s policy environment to Texas’ (an example of a state that pays a relatively low government compensation premium), California has one of the highest percentages of unionized government workers (61.9 percent), while Texas has one of the lowest percentages of unionized government workers (12.6 percent). And, California’s collective bargaining requirements compared to Texas’ prohibition on collective bargaining is an important driver of the state’s high unionization rate. Not surprisingly, California’s state and local government compensation premium over the private sector is also significantly larger than Texas’.
And, these results are not confined to a simple comparison between California and Texas. Studies have consistently found a large compensation premium for public union workers versus public non-union workers. As an example, Chris Edwards (2010) found that “Unionized public sector workers have far higher wages and benefits, on average, than non-unionized public sector workers. Their wages are 31 percent higher, on average, and their benefits are 68 percent higher. Overall, the union compensation advantage in the public sector is 42 percent.”
In light of these results, California, like Texas, should remove the guarantee for collective bargaining, and ideally, as FDR might counsel, prohibit the practice all together. Similarly, the right to strike and to arbitration should similarly be severely limited and ideally removed. These reforms will remove the system’s current biases toward creating policies that lead to excessive compensation levels for state and local government employees.
To address the current compensation levels, the causal practices that are driving California’s compensation costs to unaffordable levels must be reformed; particularly the health and pension systems offered to California’s state and local employees.
Instead of attempting to change the Rube Goldberg that is California’s current defined benefit system, the ideal reform would freeze all current retirement plans and switch all employees to a defined contribution plan that meets the average standards of large private sector companies. The frozen retirement plan would then pay all current employees the benefits that they have already accrued in the defined benefit plan, but no new benefits would be accrued even to current employees. The defined benefit plan would continue operating with the purpose of paying out current obligations. To address health care benefits, California should implement Health Savings Accounts to cover employees and pensioners health costs as was done in Indiana under Governor Mitch Daniels.
While eliminating the defined benefit pension systems is the ideal reform, such a reform may be politically unattainable. However, the need to bring public compensation in line with the private sector remains. Under these constraints, reforms to the current generosity of the defined benefit system should include: (i) increasing the number of years used to calculate retiree pension benefits; (ii) raising the retirement age, while accounting for the different needs of different professions; (iii) disallowing retirees to draw both a state salary and a state pension; (iv) create salary increase caps for the purpose of calculating pensions to protect taxpayers against pension spiking; and (v) increasing employee contributions to their own retirement.
Following this reform model will achieve many goals. These reforms address California’s pension funding problem; level the playing field between public sector compensation and private sector compensation; and help to sustainably resolve California’s state and local budget crises by controlling a large and growing expense that is literally bankrupting the state. For California’s taxpayers, who simultaneously must pay one of the highest state tax burdens in the country while enduring one of the weakest state economic recoveries, it is also the fiscally responsible thing to do.