The Politics of State Budget Cuts

The continuing squeeze on state and municipal budgets promises to produce a lively and contentious budget season this winter and early spring as governors and mayors grapple with several hundred billion dollars in collective deficits. The spending cutters, wielding their budget axes, and the revenue “enhancers,” looking for that next pot of money, will have plenty to do.

But as a report by the National Governors Association observed last year, the old tactic of simply cutting spending or raising taxes isn’t enough at this point. The governors’ report described “new austere realities” that require reform of how states and cities spend their money, and the laws governing that spending.

Part of that reform, I would argue, is to take a hard look at the laws passed over the years, often at the behest of advocacy groups and public sector unions, that favor an ever-growing government and that make cutbacks during times of stress difficult to do. Real reform requires unwinding some of these laws that have kept government growing on auto-pilot.

Legislation designed to settle contract disputes between public employees and state or local governments is a rich area for reform. Although advocates of these laws, which set in place arbitration procedures, often promote them on the grounds that they make the contract process more manageable, in some states the laws have been rigged with clauses and procedures that wind up dramatically boosting public employee salaries over time.

Until recently in New Jersey, for instance, the arbitration process for police and fire personnel did not require that arbitrators take into account the impact of their salary awards on local property taxes. Arbitrators typically gave out awards that were well above wage increases in the private sector, especially in wealthier towns, so that over time police and fire pay grew faster than the economy and tax revenues, squeezing out other costs.

In New York State, meanwhile, an arbitration system created by the legislature in the election year of 1974 to garner union support never required that arbitrators consider a community’s ability to pay for the increases that they were giving to public employees. The salaries of those employees covered by the arbitration procedure soared well beyond that of other government employees. According to a 2008 study by the Manhattan Institute, police and fire officers in the state saw their salaries increase by 60 percent over the decade spanning 1997 through 2007, about double the average wage gain in the state that year. County police officers, one group covered by the arbitration process, earned an average $121,000 a year in salary by the end of that period.

Reform on arbitration has already begun. At the end of last year, New Jersey Gov. Chris Christie signed a new law into place that limits salary increases that arbitrators can make to two percent annually, an incentive for unions now to avoid the arbitration process rather than embrace it. The reform was backed by the Democratic president of the state’s senate, John Sweeney, an official in Jersey’s pipefitters’ union, who said: “I’m a labor guy. Arbitration works when the system is balanced. But the system got out of whack.” Other governors are eying arbitration reforms, too, including John Kasich in Ohio.

Gov. Christie’s efforts to tame the Jersey budget go well beyond merely making the spending column and the revenue column match for next year. Christie has created what he describes as a “toolkit” of 33 reforms which he says is essential to enabling the state and its municipalities to do a better job of controlling the growth of government.

In New Jersey, for instance, state law doesn’t allow local governments to furlough workers, a worker-friendly restriction that ties the hands of government officials. Christie wants to end that restriction. He also wants to end rules that require governments to lay off workers based on seniority. Instead, he argues that agencies and local governments should have the same ability that most private firms have, which is to decide on their own how to reduce their workforce.

The New Jersey governor also wants to make it easier for local governments to challenge state mandates on them. In all too many places a state legislature regularly passes new laws mandating actions by local government or school districts without providing the funds to pay for their mandates. It’s tempting for legislators to tell constituencies and advocacy groups they gave them something new when it’s some other government official that has to figure out how to pay for it.

There are many subtle ways that legislative changes influence state and local budgets without being readily apparent to voters. In some states where local school board members are elected, not appointed, the votes take place in the spring, when no other elections are transpiring, instead of in November, when federal officials and state offices are up for grabs and turnout is heavier. The scheduling is designed to allow special interests with a stake in the schools, from teachers and parents to administrators, to dominate the vote and elect boards that are often friendly to expanding school spending. A number of governors say they want to change that practice, including New York Governor Andrew Cuomo, who is pushing to hold all elections in the state on the same day in November to reduce the influence of special interests.

Over the years public employee unions and their allies have succeeded in getting a host of different kinds of legislation passed to make it difficult to cut or restrain state and municipal budgets. Often, few taxpayers understand the impact of these laws.

One common legislative vehicle, for instance, is wage laws which demand that those companies which contract with government pay workers a ‘living’ wage, often defined as substantially above minimum wage. One purpose of these laws is often to make outsourcing of services so expensive that it doesn’t pay for government to contract with outside firms who pay market wages. Indeed, a living wage manual produced by labor groups and advocacy organizations in the 1990s to promote campaigns across the country put it simply when it said: “The Living Wage undercuts the incentive to privatize.”

Unions have tried many ways to stop cities and states from bidding out services and projects to the private sector. California law, for instance, made it difficult over the years to build and finance transportation projects using partnerships with the private sector because state agencies didn’t have the authority to pursue these deals, and public unions fought any attempts to change the law. But in 2009 the state finally passed legislation allowing such deals. Now unions have gone to court to kill the first such arrangement, in which California is paying a private company $173 million to build and operate for 30 years a new parkway near the Golden Gate Bridge. The cash-strapped state says the deal will save California taxpayers $123 million, if the courts let it go through.

In a few places where the political climate has changed drastically, new governors and legislators are even talking about perhaps the biggest change of all, rescinding collective bargaining rights for public workers. Few taxpayers understand that in most places public workers didn’t gain the right to bargain collectively with governments regarding compensation and work rules until the 1960s and 1970s. Previously, public employees were denied that right because, as President Franklin Delano Roosevelt explained, “a strike of public employees manifests nothing less than an intent on their part to obstruct the operations of government until their demands are met.”

That attitude changed when a series of politicians, starting most prominently with New York City Mayor Robert Wagner in the late 1950s, came to see public employees as potential political allies and gradually began granting their organizations and associations bargaining rights. From 1960 through 1980 the proportion of public employees in unions increased from 10 percent to 36 percent, so that today more government employees belong to unions than private workers.

The new leaders of the public union movement understood the import of the change almost immediately. In 1975 Victor Gotbaum, a New York government union labor leader, famously described the new relationship between public unions and politicians when he said, “We have the ability, in a sense, to elect our own boss.” Not surprisingly, public unions have become among our biggest political spenders and most active organizations in campaigns. The list of campaign giving’s ’heavy hitters’ over the last 20 years, compiled by the Center For Responsive Politics, includes at #3 the American Federation of State, County and Municipal Employees ($43,028,411), the National Education Association at #8 ($31,127,590), and the Service Employees International Union, half of whose 2.2 million members are public employees, at #11.

Not only have unions in places with the highest levels of representation been effective at bargaining for pay and benefits, but as labor economist Richard Freeman has observed, they’ve also used their political power “to raise demand for public services.” To pay for that, public unions in many places have become among the biggest advocates for higher taxes, as I’ve written before on RealClearMarkets.

The battle over collective bargaining rights would be bitter and time-consuming, especially in states where public unions are the most powerful. That’s probably one reason why Gov. Christie hasn’t proposed that as one of his toolkit items; his chances of success would be slim. But at least two new governors, Scott Walker in Wisconsin and John Kasich in Ohio, have suggested pursuing the measure. In 2005, Indiana Governor Mitch Daniels had an easier time revoking them in his state; the rights had been granted by executive order, not legislation, and he simply rescinded them.

If as a taxpayer you’ve ever gone to a local town hall meeting in a state which has a web of laws and regulations like those I’ve described above, you’ve heard officials describe how many ways their hands are tied when it comes to cutting budgets. Restoring fiscal balance in some places will require unwinding some of the laws that have stacked the deck against the ordinary taxpayer.

This piece originally appeared in RealClearMarkets

This piece originally appeared in RealClearMarkets