Never-ending deficits and unemployment at 12-percent-plus are just two illustrations of a seriously sick California economy. Many sensible solutions have been discarded out of hand because of the power of public-sector unions. The challenge for state leaders is to make these unions part of the solution instead of the problem.
In the traditional bargain with public-sector workers, they received less than market wages but higher health care, pension, and vacation benefits, as well as greater job security. This arrangement has broken down. It is now generally accepted that public sector workers, by and large, receive higher pay and benefits than their private-sector counterparts.
Particular attention has been paid to the astronomical and unsustainable cost of public-sector pensions. Many reasonable proposals have been offered by both legislators and private organizations, including shifting new employees to a 401(k)-like system.
That is a reasonable proposal but, to borrow a phrase from governor-elect Jerry Brown, let me offer a “fundamental rethink” of the entire employee compensation issue based on two simple principles.
The first is that employers, in this case, the state government, don’t, or shouldn’t, care about the composition of employee compensation.
The mix of pay, benefits, and other compensation is almost entirely irrelevant to an employer. Employers’ principal consideration is the total cost of the employee.
In his previous stint as governor, Jerry Brown approved collective bargaining for state employees. He should now admit that state government has done a terrible job of managing the compensation of its workers.
Our new governor should submit a proposal for completely overhauling the compensation system of all unionized state workers. Specifically, the state should, beginning in 2011, compensate all unionized employees with a flat hourly fee. The fee would include all sources of compensation (i.e. pay and benefits) and would be based on private-sector equivalents.
The second principle is that the governor and all legislators should understand the inherent conflict of interests between public sector unions and the government, which has led to the state’s unsustainable situation, but these conflicts could be transformed into a source of strength through a second reform.
Have the state government remit the flat per-hour payment to the respective unions, which then would be charged with determining the preferences of their members, in terms of the mix of pay and benefits to come from the flat payment. If workers want to retain gold-plated pensions, for example, that’s fine under this system, except that the cost of those pensions would result in less straight pay and other benefits.
The key under this approach is that the unions would be responsible for fitting the pay and benefits into a single envelope of compensation based on the flat hourly fee paid by the state.
In addition, the unions would be free either to contract out the management of their benefits (health and pensions) or provide them internally. The government would no longer be responsible for any shortfalls nor would it benefit from any surpluses. Instead, the union and its members would now be responsible for the proper management and funding of its health and pension benefits.
Such an arrangement would release the state – taxpayers, that is – from current unsustainable and, frankly, irresponsible commitments of the past regarding public sector pay and benefits.
Most important, it would bring the unions into the process of solving the problem rather than being a barrier to solutions. Some might call these reforms radical, but in our current economic calamity, tinkering around the edges is not enough.