City Journal Autumn 2014

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Autumn 2014
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Steven Malanga
The Compensation Monster Devouring Cities « Back to Story

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Bankruptcy and pension/benefit cuts are the only solution! And the sooner this happens the better it will be for all involved.
Very well done. Again it shows that nothing is "free", somebody has to pay the piper. Perhaps new laws would require a public disclosure of all the cities and states liabilities, present and projected. Those politicians making promises they know the next generation can not meet, they just kick the bucket on down the road should be held accountable, and the most grievious ones should do some jail time.
Thank you Mr. Malanga for your detailed analysis covering the public employee compensations. So much of the public employee dialogue has got lost in the news media spin of "union busting." I will be forwarding your article to many people who refuse to believe that there is a problem and many of these people are public employees. It is high time for everyone to understand that the threat of unsustainable public employee pensions are real and why they happened.
All government employees should have defined contribution retirement programs. Governments should contribute a floor percentage (5-7% annually) with a matching formula for employee contributions. Private accounts managed by a no-load funds manager (who gets incentivized for performance). Then they'd have skin in the "growth economy game." Just like the rest of us.
As a subscriber for a number of years, I thank you for the articles in your Journal. They are always controversial, well-written, in depth and mostly correct. I am curious about your workings inside and wonder what is it about your antagonists, or those who have no idea at all, why is it they do not get it? At your staff meetings you must wonder about this. In the recent piece about The Great Courses (which I use), Ms Mac Donald writes about a Penn professor who would not speak to her, "I cannot in good conscience contribute in any way to any project associated with an institution which rejects everything I believe......" . What are they THINKING? And if that position is correct, does it give him the right to not pay his federal taxes also??? I am truly puzzled and often maddened by these people.
On the other coast, New York City has seen its annual pension contributions explode from $1.5 billion (6 percent of city funds) in 2002 to an estimated $8.5 billion (18 percent of city funds) in 2012. Pension expenditures have taken more than one-third of the entire increase in Gotham tax collections over that period.

Related to this is the stealth disability monster where cops and fireman get a free pass on disability retirements, only to go out and run marathons.
If you look individual pension costs in New York, you will see that at the high end of the spectrum are those who worked for school districts and law enforcement.

Civil service workers hired over the last 30 years (Tier III and above in pension parlance) are penalized if their salary increases from year to year by more than 10%. Politicians invariably cater to the law enforcement personnel, allowing them to include overtime into the calculation of pension, with no cap whatsoever.

As for school districts, the voters (yes, "the American Taxpayer")have a choice to say "no" to the school budgets, but they seldom do. Democracy in action, you know.

Please don't let these facts sort of get in the way of your arguments.

This won't end pretty when 20 year olds and 70 year olds have to work 2 jobs (but can't find 1) to pay 50 year retired government employees $80,000 pensions while the retired government employees are double dipping at their second government job obtained through cronyism.
I can see that I am a little late to the party here and it was interesting to read the various comments. I, for one, have been a vocal critic of the pension costs to taxpayers for quite sometime now and, I have also been critical of private business pawning their pension liabilities off onto the taxpayers via the Pension Guarantee Trust Corporaton when they go bankrupt. But, back to the topic at hand.

I think it is insane that we, the taxpayers, are on the hook to pay these ridiculous compensation and retirement benefits. I just read that since 1974 teachers in Florida have not had to pay one dime into their retirement until Gov. Scott passed legislation requiring a three percent contribution this past legislative session. The compensation/retirement wolf in the form of government unions and civil service laws is now at the door and they don't give a you know what about the taxpayers and only care about what they are going to get from the taxpayer. I have a friend who retired from education in his fifties and drew 66K, plus benefits (only $115/mth for healthcare) his first year in retirement and he is guaranteed a three percent (compounded) annual COLA. And when we have a discussion about this subject his response is that he could care less as long as his money arrives every month. Government workers and retirees don't see any need to chage the current system and I am afraid the rest of us will be left holding the bag.
The simple solution is, since virtually none of these employees contribute to these plans just cut them off. Here in Canada, as a government worker fifty percent of the total pension contribution is made by the employee. So I have a direct ownership stake as I've invested my earnings into the program, these people have no financial or moral claim to nothing other than a promise. It's absurd to validate these benefit claims as retirement benefits, the majority of those "retirees" are likely to be running businesses or services as tradesmen. We've reached the apex of a greedy, selfish generation, double dipping with fat pensions and a secondary stream of likely unreported earnings. Just send a condolence letter to them, indicating that the promise for a free, unearned pension has unexpectedly expired.
Someone called Bob Brinker to complain about police and fire salaries. Then the transmission started cutting out. Then they cut to an unannounced commercial. The MSM doesn't like criticizing public unions.
I work at a school in CA and I call the teachers jobicidal. I am not a teacher, work part time, small if any retirement. I'm a SEIU/Tea Partier.(one is forced) The teachers pay/vote for politicians that are driving private sector jobs out of CA.(there goes their paychecks) I am forced to pay for this and in return I got four furlough days last years and they are projecting seven next year. Then they turn around and want to protest in Sacramento. I was there, not on their side and wished I had a purple shirt to wear. Are they really that dumb? They all have college degrees, I don't. I tried to talk to them about prop 23 that would have helped keep jobs in CA but they wanted their green prop 32 to stay. Sorry but you can't be green and union. It doesn't work. Any advice? I'm wondering how many furlough days it will take to wake them up. I also asked my local Cong. rep. people if they had any furlough days and they said no. I told them, you guys take care of yourselves.
Scott, unfortunately unskilled private sector workers make far less than their public sector counterparts. The bus drivers that work the airport shuttles that leave from Midtown make between $10 - $20 per hour with very few benefits. The security guards in my apartment building make between $8-$15 an hour with no benefits. The janitors for Christi Cleaning Service, who have a contract with the Port Authority, make $9-$15 an hour with no benefits. All of these positions were full time.
@exexzonie - No, I meant private businesses. Although private businesses are more efficiently run than the private sector, too many private companies are now by cliques and inexperienced executives who make horrible business decisions but are kept on because they're the friend of ___(add name of big shot here)____.

I think WmarkW and Scott have the two best posts in this discussion.
Unlike a lot of people who consider themselves conservatives, I think government does some things very well. The problem is that it isn't a sufficiently hard-nosed economic actor. From public employee unions, to defense contractors, to welfare recipients, to agriculture subsidies (I tried to balance liberal and conservative examples); the problem isn't that government DOES these things (they're all valuable) it's that the government regulatory entities have a much closer relationship to the receiving entities than to the paying entities.

"Democracies perish when the people realize they can vote themselves money." The entire political spectrum is now in that game.
Scott, You forgot the MOST IMPORTANT rule of all .... Civil Servants would get 401K-style Defined Contribution Plans with a MODEST employer (meaning taxpayer) match of about 5%of cash pay (JUST LIKE PRIVATE SECTOR WORKERS TYPICALLY GET).... instead of the excessively expensive Defined BENEFIT Plans that they now have that sometimes require an annual contribution from taxpayers of as much as 50% of cash pay.
@RBC said, "Unfortunately private business has become a job bank for politicos, friends, voters and relatives."

I think you meant public entities, not private business. The private businesses I've worked for have as few people as possible, with more layoffs a constant threat, and contractors to take up the periodic bursts of workload. One contractor was hired to do two weeks worth of work!
If I ruled the world here's how it would be ;)

1. State and local employees would be in Social Security the same as everyone else. Their employers would have to pay the 6.5% employer share, the same as a private employer--no more going years without making any contributions at all.

2. Annual performance reviews would be done to eliminate the slackers, but there would also be bonuses available for those who did extraordinary work.

3. Salaries would be brought in line with the private sector. This would require pay reductions in some areas, and raises in others.

4. Exceptional employees would be given a chance to be promoted to management, vs the current system where the cousin/niece/nephew of a councilman/supervisor/alderman is brought in. Managers would be required to know something about the areas they managed vs. giving out management jobs as political payback.

5. Union membership would be optional.

... "Government employees with the lowest skill levels do much better (proportionately)than those with higher skill levels."

Probably the most incorrect statement posted here. ...

Sounds like we're actually in agreement. High-skill jobs such as network engineer, architect, programmer, etc. pay about $40-$50 hour in the public sector and a lot more in the private sector, while unskilled and semi-skilled jobs, such as janitor and bus driver, pay $25 an hour plus, far more than the private sector.
Perhaps we'll have to build or expand new cities and abandon the old ones to their fate.
"Government employees with the lowest skill levels do much better (proportionately)than those with higher skill levels."

Probably the most incorrect statement posted here. My mother, who was a word processor at a law firm, made just as much money as her sister (a unionized clerk for the NYC Dept of Probation) AND her husband (a union NYC Transit bus driver).

If municipal jobs paid so much better than the private sector, than all of us private sector workers would be clamoring to be municipal employees. We're not - and that's due to the fact that private sector workers are paid more. I'm a senior accountant and if I worked for the City I would be paid $10K LESS.

Also realize that, unlike private industry, the City doesn't pay bonuses and the perks at a City job are little to none. If you work for the City, there is no free coffee, no company paid outings or holiday parties, no flextime or option to work from home, no leaving early before a holiday.

Private sector employees complaining about municipal workers don't understand what they're NOT missing.
"Run the cities and towns like private businesses, not like a job bank for politicians' friends, voters, and relatives."

Unfortunately private business has become a job bank for politicos, friends, voters and relatives.
Responding to owkrender:

Yes, contributions by employers were skipped or shorted, but nothing changes the fact that the employee contributions WITH interest only pay for 10-20% of their Pension Plan's cost. This is absurd and must change ........ many-fold !

Private Sector taxpayers fund the opposite ...THEY fund 89-90% of their retirements .... and so Must Civil Servants.
Employers are paying a lot now because 10 years ago, in the midst of the tech bubble, judgments were made to reduce or eliminate employer contributions, due to the then apparent ample funding of the systems. That's why this sort of article cites percent increases over a decade and percentage of employee expenditures. While I don not doubt that these decisions were made in good faith, does it make sense to blame the beneficiaries of the retirement fund to which the money is owed?

Please look at long term average contributions and the efficiency of defined benefit retirement systems before judging.
Well Stated !

The No. 1 strategy for ALL towns/cities should be to Outsource everything (perhaps leaving Police, but NOTHING else on the table) as this ends the "employment relationship" and with it all future growth in pensions and benefits.

Outsourcing is the ONLY effective option unless CURRENT (yes CURRENT) employees accept a hard freeze on the Defined Benefit Pensions, with replacement (for FUTURE service) by a 401k-style Defined Contribution with a modest taxpayer "match" (such as 5%). Note that this change would NOT reduce pension benefits already accrued for PAST service.

And NONE of the above address the ALREADY huge accrued liability for pension accrual associated with PAST service. This ALONE will likely be insurmountable for many towns/cities.
Quoting ..."The mayor’s actions brought angry police into the streets, blocking traffic and blaring sirens in protest. "


Did you catch that ?

It was the POLICE who did this !

They should ALL be FIRED ....PERIOD !
Interesting article. A couple of points:

First, (and I know I'll get flack for this) when I was just entering the job market in the 70's it was understood that if you wanted a government job, you accepted lower pay in exchange for less work, and a few additional benefits. In fact, (and yes, anecdotally) on my friends first day on the job circa 1967 for a State agency he was told to always bring his golf bag for those days when doing "field work." That's of course not to say that all government workers are lazy, but it was understood that in exchange for the lower pay, the work load was lighter.

Second, it doesn't take a rocket scientist to figure out that allowing government workers to unionize AND make political donations is a recipe for utter disaster. And a disaster it has been - government unions donate what is taxpayer dollars to ONE party, and in return that party has granted extraordinary wages and other concessions. It's not only an impossible situation it is unfair as well - why should one party be entitled to taxpayer subsidies? Combine this with low turnout as a result of having local and school board elections on a different schedule than the regular elections, and all of a sudden the government workers become an enormously powerful voting block - able to elect only those politicians who agree to give them whatever they want.

It is an insane system - the only surprise is that the rest of the voters go along with it (more about that later). In fact, in New York there is an entire political party made up of government workers - the ironically names "Working Families Party."

Here in Essex County New Jersey, the county where Newark is located, taxes have reached absurd heights. As I've mentioned elsewhere, my senior citizen father was forced to move when taxes reached $21,000/year on his $650,000 home. And that was five years ago - who knows where taxes are these days. We were always told that it was the need to subsidize Newark that was the reason for the high taxes, but that is absurd as well - cities are not supposed to drain money from the areas around them, cities are supposed to be engines of prosperity. And that isn't the reason for high taxes anyway it is the countywide patronage system and the consequent insane salaries and benefits of government workers.

The system not only beggers government it prevents government, from doing great things - new roadway systems, monuments, parks etc. all out of the question. Even basic functions are in jeopardy, as pointed out here.

And the system of donations corrupts the political system, in fact, it IS the very definition of institutionalized corruption.

However, the biggest issue is not addressed in this article - where is the media in all this? Where are the Frontline documentaries, the "60 Minutes" pieces, the headline stories about a system that is inherently corrupt, and makes government basically unable to govern? The answer is simple - the media doesn't get involved with this because it is the Democrats who benefit, and our media by and large supports Democrats. If the shoe were on the other foot - if it was Republicans who got the union largesse - then this would be front page news, there would be a stream of editorials, PBS documentaries, maybe even a Michael Moore movie. Instead...dead silence. And that's the real story here.

Absent the Republican shellacking of the Democrats last November what we would no doubt see is Washington running to the rescue. In fact, one question I do have is to what extent the "stimulus" gave local government subsidies for union benefits, and whether Obamacare does the same.

Whatever happens, it will interesting - as the article points out these wages and benefits promised are unaffordable.
I must respond to the remarks by Sandra that my facts on Costa Mesa are wrong, because they are typical of the misleading remarks of union advocates who try to minimize the impact of compensation on budgets.

To her notion that the CM budget is much larger than I claim it is, she is including everything but the kitchen sink, including those items that are transfers from other levels of government that can't be used for pensions. In fact, the budget passed last week included general fund spending of $94 million. Throughout the spring the GF for fiscal 2011 was described as $93 million (it was upped a bit after we went to press because of marginally better tax collections.). The general fund consists of local tax dollars used to pay substantially all employee costs in most local government, and GF spending is what I used throughout the piece. I identify that method early in discussing budget trends in general around the country.

Second, Jim Righeimer is the Mayor Pro Tem of Costa Mesa, which means he serves as mayor in the absence of the mayor. That quote comes from him comes from an appearance early in the spring when he was identified as the mayor in press reports, probably because he was serving in that capacity. I regret the minor discrepancy, but it has little bearing on the substance of the discussion.

You will note, however, that Sandra does not dispute the sharp rise in pension costs in Costa Mesa, which have tripled and which are the essence of the problem.

You will also note that she suggests there is no fiscal crisis because of reserve funds belonging to CM, which are actually designated for other purposes. CM, as well as many other cities, have been drawing down their reserves since the beginning of the recession, sometimes in violation of local charters which designate other uses for the money. Moreover, without reform, pension costs will continue to skyrocket even after reserves have disappeared. That's a road to nowhere for taxpayers.

The hidden cost of lavish pensions and benefits is that they attract the sort of bureaucratic time servers who don't do much actual work... they spend all day calculating and optimizing their benefits.

By contrast spending the exact same money on higher salaries without benefits, might attract at least some people willing to work for their pay.

Of course politicians despise people like that.
A few facts that seem to be too easy to ignore. Government employees with the lowest skill levels do much better (proportionately)than those with higher skill levels. That is simply a product of the union system - many clerks out vote a few managers. Retirement benefits for government employees are much better for those who retire than those who quit before retirement age (some plans are all or nothing. Again this is a union issue - members with 20 years in care more about this than those with 5 in. Overall government compensation is about par with the private sector but these things select for low skilled workers who are tired of their jobs but can't afford to quit. Not a good way to do business.
Americans seem to have awoken to this issue within the past year although some saw the writing on the wall some time ago. Public sector unions need to go.

Municipalities have no business negotiating benefits on the scale that has been seen of late.

You post the jobs and say 'here's the deal'. Some say that you'll not get the best and brightest without the attractive packages and it sounds like a good argument till you have to deal with the municipality and realize that mediocrity is as rampant there as anywhere...they just get paid with our money.



@Scott: "I would agree with you except that most public employees receive a pension IN LIEU OF Social Security, i.e. If States did not offer a pension, they would likely be required to begin contributing the 6% employer contribution to Social Security..."

I cannot imagine that it would cost more to use the SS system that it does to pay someone 75,000 to 100,000 a year for life with healthcare thrown in.



Run the cities and towns like private businesses, not like a job bank for politicians' friends, voters, and relatives.
Hire a competent, out of state, accounting firm to analyze the pension and benefits liabilities of your city, come up with a real annual dollar amount, and terminate enough city employees to cover the annual liability. If police and firefighters have to go, hire private firms to fill the gap. If the public unions take the city to court,lay off all of the public employees and ask the Governor to send in the National Guard.
Or watch the city go bankrupt, which may be the best solution after all. Resign yourself to being the one-term mayor who restored your city to fiscal sanity.
The material re Costa Mesa is factually wrong on a number of counts. First, the 2010-2011 Costa Mesa budget was about $109 million, not $93 million. The $15 million cost for pensions this year and the previous is a reduction from $16.5 million two years ago. Mr. Righeimer is vice mayor, not mayor, of Costa Mesa.
Finally, there is no budget "crisis" in Costa Mesa. The City has over $14 million in emergency reserves, millions more in the liability fund, and millions more in the equipment replacement fund. The so-called crisis is purely political.
No one, including the voters or local media noticed anything when the money was rolling in. Now it's time to pay the bill and the public unions are screaming like stuck pigs.

Here in San Diego a bunch of volunteers tried to help out cleaning up the beach and were stopped from acting by the city employee unions under some claim that the unpaid labor was stealing their work.
I don't know if this will affect your "organic" theory of cities decline, but it should. There's nothing organic abut the decimation of Detroit unless you mean the unfettered and ceaseless control by Democrats. By the way, most (if not all) the mayours talking here are Democrats.
@Kurt: I would agree with you except that most public employees receive a pension IN LIEU OF Social Security, i.e. If States did not offer a pension, they would likely be required to begin contributing the 6% employer contribution to Social Security, which in many cases would be more than they have been contributing to pensions!
Unfortunately, in the public sector, unskilled labor is paid extremely well but skilled labor requiring higher education or technical training is not.

I was an I.T. manager for the State for several years and it was virtually impossible to get a talented programmer to come work for us for the $60K maximum we could pay when the private sector was easily paying $80-90K for equivalent experience. The health benefits were good, but that meant little to younger workers.

We would try to sell the lack of Social Security tax as a benefit, but that rang hollow once employees saw that they had to pay 8% toward their pension.

Unfortunately, I don't see an easy solution since the unions have been clever enough to tie wages and compensation for well-educated, skilled workers to those of their not-so-well-educated unskilled counterparts.

Cities and states will still be able to attract unskilled labor even with wage and benefit cuts, but the skilled labor required for a lot of work: I.T., engineering, etc. will be a tough sell.
How about the following two-fold solution going forward: First, keep the Federal Government, States, Counties and Municipalities strictly separated with no bail-outs of any kind. That way the bond market or any other creditor to those entities will automatically enforce financial discipline (assuming creditors are not willing to donate their money by not getting paid). Hopefully it will take only a few municipal bankruptcies with serious "haircuts" before true spending discipline is restored. From that point on profligate spending should be met quickly with rising interest rates and/or absence of credit.
Second, immediately change all types of non-salary benefits from "defined benefits", the costs of which are either unknowable, can vary greatly or at least cannot be calculated with certainty, to "defined contributions", the costs of which are by definition instantly known. That way there will be immediate feedback of the true costs of the services that the taxpayers desire AND ARE WILLING TO PAY FOR. It would seem to me immoral, at the very least, for certain constituents to enjoy city or county services at a fraction of their true cost today, while some future constituents, who were not around to enjoy them, are left to pay for the remainig fraction at a later date. No doubt the politician who sold those services below-cost was very popular, reelected several times and has since retired with much gratitude for his "public service".
Come to think of it, maybe it is us, the voters who still believe in something while getting somebody else to pay for it, who are to blame. Maybe we (all of us collectively) out-smarted ourselves???
Another reason the federal debt ceiling cannot be raised. Spending cutbacks at all levels of government have to occur. There is not enough money for the rich to pay for the federal deficit for a year, much less pay for state and local deficits.
Absurd. Local and State governments have known for decades they would have to pay these pensions. There was plenty of time and money available to secure them. Now times are tough and they declare poverty ? Irresponsible deadbeats who want to weasel out of contracts they made no attempt to fulfill and had no intention of keeping.