City Journal
Steven Malanga
Oversold, Underfunded
New York’s burdensome new teachers’ contract uses gimmicks to make the numbers work.
2 May 2014

The de Blasio administration and New York City’s teachers’ union cemented the details of a new contract on Thursday that the parties involved described as moderate and affordable. Under the agreement, teachers’ wages would go up 18 percent over nine years, which the city would help pay for by reducing health-care costs by $1.3 billion. But the deal is more expensive than advertised, contains significant risks for taxpayers, and comes at the expense of other pressing city needs. In its first major deal, the de Blasio administration has set a precedent for budget gimmickry.

Teachers had been working without a contract since 2009, because Mayor Bloomberg had refused to give them the 4 percent annual salary raises they wanted without some commensurate savings elsewhere—such as on health-care costs. Officials of the United Federation of Teachers then spent the next four years complaining that its 100,000 members were going without raises. The new contract gives teachers back pay equivalent to the 4 percent raises they originally wanted, but spread out over five years—from 2015 through 2020. The total bill should exceed $5 billion, but de Blasio claims that the health-care savings will offset a good portion of that.

The mayor isn’t shooting straight. For one thing, New York City workers actually get two kinds of raises: the contractual pay increases agreed to on Thursday, and so-called “step increases”—mostly seniority pay hikes that reward workers for serving additional years on the job. The step increases will continue, piling even more pay gains on top of the new contract; and in fact, these seniority increases continued throughout the last four years, even as the union claimed workers weren’t getting raises. A Manhattan Institute study using actual city payroll data calculated that teachers received $1.2 billion in pay increases between 2009 and 2013, when no contract was in force. During 2013 alone, the step increases—a type of pay that has almost vanished in the private sector—added $469 million to the schools’ budget. These additional increases will add hundreds of millions of dollars more per year throughout the rest of the contract, which extends to 2018. That’s one reason why the “modest” 18 percent increase in wages the city and union trumpeted will actually be larger.

The structure of the deal sets a dangerous precedent, too, because taxpayers in 2019 and 2020 will be paying for work that city employees did in 2009 and 2010—simply because the de Blasio administration has determined that workers should have been compensated more under the previous administration. This is exactly the kind of fiscal wheeling and dealing by elected officials that has helped pile up billions of dollars in local debt and squeezed taxpayers across the country. De Blasio has now demonstrated that he’ll rely on just such questionable accounting practices to reward workers with money that won’t be on hand for years.

On top of these problems, the health-care savings that the city is depending on are highly speculative. If an employer genuinely wants to save money on health benefits, the reliable way to do so is to ask employees to contribute toward their own insurance premiums—as virtually all private-sector employees and many government workers already do, including New York State workers. But 90 percent of the city’s employees still receive health care while bearing none of the cost of their premiums. The new contract won’t change that. Instead, the city claims it will get big savings from ill-defined programs, like buying pharmaceuticals in bulk. That’s the equivalent of the federal government telling us that the Affordable Care Act will reduce health-care costs—it’s mostly a leap of faith. But it allows the de Blasio administration to claim that its contract numbers add up.

Other city unions working without contracts have complained about the idea of wringing any savings from health care. That’s because unions in New York have resisted all changes to the current system, including even the Bloomberg administration’s modest efforts to restrain cost increases by letting other insurers bid for the city’s health-insurance contracts.

De Blasio will pay for the initial years of the new contract with surpluses left over from the Bloomberg years. Those extra dollars are not the result of a robust economy, but of extraordinary efforts—such as selling additional taxi medallions—that the Bloomberg administration made to raise one-time revenues. To pay for the deal’s later years, when the retroactive pay is loaded on top of the steadily increasing yearly salary gains, the city will need the kind of revenue expansion it saw in the middle of the last decade, when housing and finance bubbles produced outsize Wall Street profits. Few financial observers expect a repeat of that any time soon.

The city is also taking on—and not paying for—vast new employee-related debt. In particular, the city has promised its retirees health care for life at an estimated cost of $85 billion. These benefits are not currently funded, and they represent another lucrative form of compensation that city employees enjoy—again, virtually unheard-of in the private sector. De Blasio ignores this issue, even as he plans to use projected future revenue gains to pay for retroactive pay increases.

New Yorkers wondering how all of this is possible should look to the state’s union-friendly laws, which dictate that when a contract between government workers and a municipality expires, the components of the agreement remain in place. For instance, union leaders knew that teachers continue receiving their “step” pay increases, even as they claimed that workers were going without raises. Similarly, whenever a city mayor tries to wring savings in health-care costs out of workers, unions can simply refuse to sign a new contract, keeping their “Cadillac” coverage plans until the mayor relents—or until a more worker-friendly mayor comes along, as has now happened in New York.

Press coverage of the new teachers’ contract included happy photos of administration officials embracing union leaders. Media accounts describe a new era of cooperation between unions and the city—which isn’t surprising, considering the strong support the teachers’ union gave de Blasio in the 2013 election. Now the city officials whom the unions helped put in place have rewarded them with a rich contract. Left out of the picture are New York’s taxpayers, who will have to pay for it all.

Steven Malanga is the senior editor of City Journal and a senior fellow at the Manhattan Institute.

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