Cash-Poor Cities Take On Unions

LOS ANGELES—Mayor Antonio Villaraigosa once organized for a teacher's union here, and later ran a branch of the American Federation of Government Employees. That makes him an unlikely advocate for cutting the benefits of the city's workers.

But with the city facing a budget deficit that could drain its reserves by summer, Mayor Villaraigosa wants to re-open contract talks with 45,000 cops, firefighters, librarians and other city employees in hopes of persuading them to contribute more to their pensions and health-care costs. His deputy chief of staff, Matt Szabo, puts it bluntly: "Unions have priced themselves out of a job."

Nationwide, politicians looking for budget cuts are confronting politically powerful unions that represent state and local government employees—15% of U.S. workers and organized labor's biggest stronghold.

In Memphis, the city's health-care committee recently recommended raising current and retired employees' health-insurance premiums by as much as 15%. And Toledo's city council last week wrung $3.1 million in concessions from its firefighters' union as part of a measure to close its budget gap.

Similar things are happening at the state level. Over the past two years, 17 states have cut benefits for employees or increased the amount that individuals must contribute to their pension plans. Three of those states—Kentucky, Texas and Vermont—did both, according to the Pew Center on the States, a public-policy think tank.

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Associated Press

Los Angeles Mayor Antonio Villaraigosa announces the elimination of the Environmental Affairs and Human Services Departments in February, cutting 46 jobs.

At the heart of this fight is an unbalanced equation: The economy is shrinking cities' and states' tax income as their pension and health-care costs have soared. As a result, some governments are diverting money from services to cover benefits, or raising taxes and fees. That doesn't sit well with some taxpayers—many frustrated at seeing their own benefits being cut by private-sector employers.

So governments are seeking cuts in union benefits long considered sacrosanct. This has risks. Public-employee unions are among the biggest political spenders, and their members vote in droves. Also, cutting benefits could make it tougher to keep the best employees.

It is tough to compare government pay to private-sector pay because many government jobs—firefighters, police officers—don't have private counterparts. But, on average, government workers make more in wages and benefits. In December, state and local governments spent an average of $39.60 in wages and benefits per hour worked on their employees, versus an average $27.42 for private employers, the Labor Department said.

The fight over benefits represents a defining moment for public employees and their unions. Government is by far the most unionized sector of the work force, and among the few places left where blue-collar workers can retire with traditional lifetime pensions. In 2009, the nation's 7.9 million unionized government workers eclipsed the number of private-sector union members for the first time since the Labor Department began keeping track in 1983.

"What comes out of all these negotiations will set the tone for public employees for a while," says Ken Jacobs of the Center for Labor Research and Education at University of California, Berkeley.

In New Jersey, outrage over state deficits helped Republican Chris Christie defeat incumbent Democrat Jon Corzine last November. A few weeks after Mr. Christie's victory, a Quinnipiac University poll found that three-fourths of state voters supported a wage freeze for state workers, and 61% favored layoffs. Last month, Gov. Christie signed a set of bills that would, among other things, cut pension benefits for future employees.

Public-employee unions argue that it's unfair to penalize them for a financial crisis that isn't their fault. They say cities and states are opportunistically taking advantage of a short-term crisis to gut benefit plans in place for decades.

Many private-company workers have seen their retirement accounts shrivel, while public-sector benefits have been relatively unscathed. Defined-contribution plans such as 401(k)s had $3.33 trillion in assets at the end of 2009, down 4% from $3.48 trillion in 2006, according to the Federal Reserve. Such accounts have lost value even though companies and workers contributed $100 billion over that period.

The rise in public-sector benefits has attracted the ire of citizens like Paul Nelson, a semi-retired investor in Upper Saddle River, N.J. Mr. Nelson, 59 years old, has a son at Northern Highlands Regional High School, where the principal says the school may have to cut teachers and increase class size. "Most public employees have retirement and health-care plans that private-sector employees can only dream of," says Mr. Nelson.

Virtually all full-time state- and local-government employees have access to retirement plans, and most are employer-funded. By contrast, only three-quarters of full-time workers in the private sector have access to retirement benefits.

Disparities like these give politicians ammunition for cost-cutting. "Public-employee benefits have to be reined in," says Andrew Koenig, a Republican state representative in Missouri.

Mr. Koenig is sponsoring a bill in his state that, over the next several decades, would shift away from a defined-benefit plan, where an employer puts as much money into a pension fund as needed to cover future retirement benefits. It would be replaced with a 401(k)-type of plan (similar to those now in place at many private-sector employers) where workers absorb the market's ups and downs.

Some argue that just because corporations have trimmed employee benefits doesn't mean the government should as well. "There has been an attack on American private-sector workers and benefits, with 401(k)s replacing traditional pensions," says Teresa Ghilarducci a professor at the New School for Social Research in New York City, "and they have failed" at providing retirement security.

At the root of governments' problems today are promises made in past decades. As a group, state and local governments have promised an estimated $3.35 trillion in pension and health-care benefits to be paid over the next three decades, but are estimated to have 70% of the money to cover those payments, according to the Pew Center on the States. Pension and health costs can consume 20% of city and state budgets.

California offers a view of the fallout. The state's largest pension fund, the California Public Employees' Retirement System, known as Calpers, is estimated to be only 57% to 65% funded. Having suffered investment losses in recent years, the state has had to dip deeper into its revenues to make up the funding gap. Last year, a budget impasse forced the state to issue IOUs for taxpayer refunds.

It wasn't long ago that California was going the other way, based on a different set of assumptions. In 1999, the state's Democratic-controlled legislature and then-governor Gray Davis passed a law expanding benefits for many state employees. A proposal prepared by Calpers—the $200 billion fund that manages money for 1.6 million of the state's employees, retirees and their beneficiaries—forecast that the boosted benefits would be paid for entirely by investment gains. "There are only two ways you can have this problem: One, the promised benefits are too big, or two, not enough money was put away," says David Crane, special adviser for Gov. Arnold Schwarzenegger.

California's contribution to its public-employee pension fund is projected at $3.5 billion in the fiscal year starting July 2010, 4% of the state's general-fund budget, the highest proportion in state history.

In Los Angeles, the battle is spilling into the public, including at a noisy City Council meeting in February. On the agenda was a plan to cut 1,000 workers and reopen contracts. Union members turned out to voice opposition.

Art Sweatman, a tree surgeon for the Department of Public Works, showed up wearing baseball cap that read "Deadwood." It was a reference to comments by Mayor Villaraigosa last year in which he said a new early-retirement program could rid the city of "deadwood" employees.

"We have to let them know we're here," says Mr. Sweatman, a member of the Service Employees International Union local 721. Mr. Sweatman's union says it is trying to meet the city half way. Local 721 has agreed to early-retirement programs and furlough days, says executive director John Tanner, but it has resisted health or pension rollbacks. "Our goal was to get through this without layoffs or cost-shifting on health care," he says.

Government benefits are almost as old as government itself. Military pensions stretch back to the Roman Empire, predating private-sector benefits by centuries. The U.S. offered retirement pay to soldiers who fought in the revolutionary war, and by 1930 the federal government gave pensions to all its employees. Pensions at private-sector employers came into widespread use only after World War II.

Lee Craig, an economics professor at North Carolina State University, says pressure has been building for years to cut government benefits, with the financial crisis accelerating that. "Their promises have finally outstripped the growth of their tax bases," he says.

California's Santa Barbara County, a coastal area known for wineries and Spanish architecture as well as Michael Jackson's former Neverland Ranch, has seen tax revenues fall over the past three years. The county has reduced its work force by 7.5% and management salaries have been frozen since 2008.

At a workshop conducted by the county's executive office, representatives from two dozen departments—the sheriff's office, mental services, and public works, among others—were required to suggest cuts. The proposals included eliminating two Spanish-speaking interpreters in the public defender's office, closing a camp for delinquent teenage boys that opened in 1944, and reducing staff in a child-abuse prevention program. Another proposed move could add four to six more weeks to the wait for food stamps.

In Redding, Calif., the mayor and city council are asking city workers to contribute 7% to 9% of their salaries to their pension funds; currently the city picks up that tab. Patrick Jones, who runs his family's gun shop in addition to serving as part-time mayor, says if the council doesn't win concessions it might use a November ballot initiative to ask voters to demand that the city negotiate benefit cuts. That move, he said, would give the city leverage in any union negotiations. "We're just trying to get as many tools as possible to quicken the time it takes" to get concessions, Mr. Jones says.

One group fighting back in Redding is the International Brotherhood of Electrical Workers, which represents 53 electrical workers on the city payroll. One recent morning, about two dozen members gathered in the "bull room," where linemen and electricians meet to get their work assignments. The workers listened to union representative Ray Thomas update them on the contract fight. Mr. Thomas said he hasn't any intention of agreeing to benefit cuts, but told his workers not to expect much.

"If it doesn't screw the future, it's something we'll have to discuss," Mr. Thomas said.

A member of the audience raised his hand and asked if it was true that deputy sheriffs in surrounding Shasta County had been considering a plan to pay more of their retirement costs.

"Did they vote to accept that?" another asked.

Mr. Thomas nodded his head yes.