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Manhattan Institute

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Government Crowded Out: How Employee Compensation Costs Are Reshaping State and Local Government

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Government Crowded Out: How Employee Compensation Costs Are Reshaping State and Local Government

May 4, 2013

Throughout the United States, state and local governments face skyrocketing costs for the pensions and health care of their current and retired teachers, firefighters, police, and other employees. Many of these costs are effectively on "autopilot": They are locked in place by law or by union contract, and lawmakers neither control nor review them. In Washington State, for example, 55-60 percent of the budget goes to pay the salaries and benefits of the state's employees, so more than half of the state budget is off limits to policymakers.

As more and more of a government budget is devoted to employee pensions and health care, lawmakers must (a) raise taxes, or (b) engage in dangerous fiscal gimmickry, or (c) take on more debt, or (d) or spend less on schools, roads, public transport, libraries, assistance for the poor, and other functions. Troublingly, many governments are choosing option (d), creating the paradox of government that spends more and more to do less and less.

In this paper, we detail how spending on public-employee pensions and health care is crowding out essential government services in states, cities, and other local-government jurisdictions.

Because of local governments' pension and health-care commitments, we report:

  • The cost to local government of employing a worker has soared. For instance, in San Jose the average cost of a full-time worker is $142,000 a year, up 85 percent in ten years. A sanitation worker in New York City now costs $144,000 annually, up from $79,000 a decade ago.

  • Governments are spending a rapidly growing percentage of precious revenue on pensions alone. For example, in 2013, according to New York City mayor Michael Bloomberg, "every penny in personal income tax we collect will go to cover our pension bill." Since 2005, the city's spending on pensions rose from 6.1 percent of the budget to 11.7 percent. In Los Angeles, pension costs were 3 percent of the budget only 10 years ago. Today, they are 18 percent.

  • The most common response to rising pension and health-care costs is to cut services. Chicago, for example, is in the process of closing 11 percent of its schools. In Des Moines, Iowa, the library is now closed one day a week, trash in the parks is picked up less often and streets are cleaned less frequently, due to a rise in police and fire pension costs of 20 percent. Despite these cuts, Des Moines has instituted a property tax increase.

  • Pensions are not the only concern. Most local governments lack any long-term strategy for funding their health-carecommitments to employees. As of 2009, the 61 American cities with a population greater than 500,000 collectively
    had $118 billion in liabilities for employee and retiree health care, and had only set aside enough money to cover
    6 percent of this. Meanwhile, U.S. states' health care liabilities increased by $22 billion (4 percent) in just one year(2009—10).

READ FULL REPORT

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