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Manhattan Institute

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How Soaring Benefit Costs Are Coming Back To Haunt Gov't Workers

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How Soaring Benefit Costs Are Coming Back To Haunt Gov't Workers

Investor's Business Daily April 28, 2017
Public SectorPension Reform

Schools across the nation are feeling the pinch as money that should go to the classroom instead goes toward paying for lavish union benefits and perks.

For years, public-employee groups used their political muscle to win contracts granting them pension and health benefits that were often better than what many private-sector workers enjoyed.

Now the exploding cost of those benefits is turning into a problem for government employees themselves, reducing pay increases and prompting ongoing job cuts, especially in states where these workers are unionized. Barring some unexpected national economic outburst that showers states and cities with new revenues, government-worker benefits will likely weigh down budgets for years.

Consider how rising pension and health-benefit costs have influenced public education spending. The Census Bureau data on public school finances for 2014 (the latest year available) show that school budgets grew by $141 billion over a 10-year period — a compound annual rate of about 3%.

But a $47.5 billion increase in benefit costs gobbled up one-third of that growth. That's a huge bill for a budget item that traditionally amounts to less than 20% of school spending. School districts responded by paying out less in wage hikes: Salaries rose by just 2% a year, on average.

Benefits are taking a big bite out of school budgets in a number of states that have made lavish pension and retiree health care promises to workers. Connecticut, with one of the worst-funded state pension systems, has seen the cost of supplying benefits to its school employees rocket by 123% over 10 years, so that benefits alone now consume 27% of its public education budgets, up from 18% a decade ago.

Similarly, the cost of benefits in Illinois schools more than doubled over 10 years, while money allocated to salaries increased just 27% — or 2.5% annually — over the same period. Meantime, benefits in Pennsylvania now account for one-quarter of the spending in school budgets. By contrast, expenditures on school salaries in the Keystone State grew by just 16%, or 1.4% annually.

In many states, there's little hope that this pressure will end soon.

Oregon benefit costs consume nearly 30% of school budgets, leaving education districts and local governments bracing for a 44% jump in pension bills alone in the next two years — amounting to $885 million in new spending. A study concluded that the additional burden could lead to significant staffing cuts in Oregon, costing as many as 10% of all public employees their jobs.

A recent study estimated that pension contributions from California school districts will have to increase from $3 billion in 2014 to $9.45 billion in 2021. "It's scaring districts right now. A lot are questioning whether they can stay afloat," an official with the California School Boards Association recently said.

As the bills come due, public officials will discover that the actual costs are even higher than reflected in these alarming data. The reason: Many state and local governments have been contributing less than they should to fund their benefits — and they can't keep doing it.

A 2016 study by Pew, for instance, found that only 15 states were putting enough money annually into their pension systems to meet future obligations. In total, Pew found that states paid 75% of what they needed to add to pensions in 2014 — leaving $28 billion in contributions unpaid.

Even the recent rise in financial markets will only marginally improve the situation; so much money is missing from government retirement funds that higher investment returns don't produce the same gains as when a system is fully financed.

With spending spiking so quickly, states and cities began cutting workers after the crash of financial markets in 2008; and in many places, politicians and administrators have not added back all the jobs they eliminated. States and cities employ about 320,000 fewer people than they did before the last recession.

Public schools have seen some of the biggest pare-backs, getting rid of about 150,000 jobs that they've yet to regain. By contrast, the private sector recovered all its lost jobs three years ago. Among the states, New York has sustained the largest net losses, down 85,000 public-sector jobs. California and Michigan have each cut about 60,000 government employees, followed by Pennsylvania, with about 45,000 fewer government positions today than at the peak several years ago.

Not surprisingly, unionized government workers, whose leaders negotiated some of the most expensive benefit packages, have borne the brunt of the reductions. Membership in government unions has plunged in five of the last seven years and is now down by 783,500 workers, or 10%, since its 2009 peak.

Taxpayers also bear the burden of rising government costs and declining workers: They're paying more for services — and getting less back. You couldn't succeed in business by offering customers less of a product for more money, of course, but this is likely to be the operating model of local governments until they regain control of benefit spending.

This piece originally appeared in Investor's Business Daily

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Steven Malanga is the George M. Yeager Fellow at the Manhattan Institute and a senior editor at City Journal.

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