To better understand what's happening in the power struggle between public employee unions and Republican governors in states like Wisconsin, Ohio and New Jersey, think of it as a kind of jigsaw puzzle — a combination of interlocking parts including the bond markets, campaign contributions, and the demographics of aging workforces.
"Democrat or Republican, it doesn’t matter," New Jersey Gov. Chris Christie said in his budget message Tuesday, as he proposed requiring public employees to pay 30 percent of the cost of their health benefits, up from an average of 8 percent now. “We are all facing the same problems. These problems are bigger than either political party.”
What Christie, Wisconsin's Scott Walker and other GOP governors are seeking to do in controlling the cost of pensions, for example, isn’t new: in 2009 and 2010 at least 18 states, with governors of both parties, revamped their pension systems to cut costs, according to the National Governors Association.
But despite Christie’s argument that party label doesn’t matter when it comes to states' finances, this is a political battle. And, in part, the fight is the consequence of last November’s elections in which voters elected Republican governors from Florida to Wisconsin and gave the GOP control of both houses of the state legislature in 25 states.
How to break down the puzzle
Here’s a way of fitting the puzzle pieces together: First, recognize the size of one piece in particular.
Measured by headcount, state and local government is a far bigger business than the federal government. According to the Bureau of Labor Statistics, federal employees, including postal workers, number 2.8 million, but there are 19.5 million state and local government employees.
Campaign finance is another puzzle piece.
Thirty-six percent of state and local government workers are union members and the public sector unions to which they belong are big donors to Democratic candidates.
In Wisconsin last year, for example, the American Federation of State, County, and Municipal Employees and the Wisconsin Federation of Teachers were among the top contributors to the campaign of Democratic gubernatorial candidate Tom Barrett. He lost to Walker ... and now the Republican is trying to curtail unions’ collective bargaining power.
Curbing the power of public sector unions, as Walker and other GOP governors are keen to do, would mean reduced electoral clout for those groups and a weakened Democratic Party.
Stimulus effect on state coffers
The next puzzle piece: the recession and how the Democratic-controlled Congress responded to it.
The stimulus partly shielded state and local government employees from the effects of the recession.
States were able to use stimulus money to pay Medicaid benefits and to keep public school teachers on the payroll, and to free up funds for other purposes.
Now the stimulus is ending, but state treasuries still haven’t fully recovered from the recession.
State general fund revenues this fiscal year are forecast to be 6.5 percent below 2008 levels, according to the National Association of State Budget Officers. Governors and legislatures must confront high fixed costs (state employees’ compensation) and persistently high Medicaid costs, due to the recession’s lingering effects and high long-term unemployment.
Employee compensation, including health care and pension benefits, accounts for 20 percent to 30 percent of total state expenditures, according to the NGA.
Spending on people, not on submarines
In operating state and local governments, said Urban Institute public finance economist Kim Rueben, “in large part what you spend money on is people ... It isn’t like the federal government which has a big military and gives big transfer payments to people (via Social Security and Medicare).”
A governor can’t balance his state’s budget by not building a new fleet of nuclear subs.
“What state and local governments do is police, and teachers and firefighters. So if you need to make cuts, it means you either need to get rid of people or you need to cut their salary and benefits, or some combination (of the two),” said Rueben.
It was a Democratic governor, New York’s Andrew Cuomo, who said in his state of the state message last month, “The costs of pensions are exploding, $1.3 billion in 1998-1999, projected for 2013, $6.2 billion, a 476 percent increase and it’s only getting worse.”
He added, “The state of New York spends too much money, it is that blunt and it is that simple ... State spending (in recent years) actually outpaced income growth.”
And like GOP governors, Cuomo is emphatic that increasing taxes won’t work this time: “the people of this state simply cannot afford to pay any more taxes, period.”
Unlike Walker, Cuomo is not seeking a confrontation with unions. In his statement unveiling his budget this month, Cuomo said he “intends to seek a partnership with the state employee labor unions” to seek savings in spending on employee compensation. But he threatened up to 9,800 layoffs if savings “cannot be accomplished jointly.”
Weighing the bond market
The next piece of the puzzle is the bond market.
A Greek-style debt crisis for a state now seems at least feasible in a way it would not have in 2008 — prompting senators to quiz Federal Reserve Chairman Ben Bernanke about the topic at a Senate Budget Committee hearing last month
The Fed chairman tried to puncture some of the concern.
“We’re not seeing extraordinary stress in the municipal markets, which suggests that investors still are reasonably confident that there won't be any defaults among major borrowers,” he said. “And one reason they might believe that is because most states have rules which put debt repayment and interest payments at a very high priority above many other obligations of the state and locality.”
He added, “I'm very, very hopeful and expect that we'll be able to avoid defaults at that (state and local government) level.”
Pressure has increased for more transparency in states’ finances. Two ratings agencies have announced recently that they would begin to recalculate states' debt burdens to include unfunded pension obligations.
States' unfunded liabilities
According to report last year by the nonpartisan Pew Center on the States, 21 states had employee pension funds that were funded below the recommended level in 2008.
According to testimony last week before the House Judiciary Committee by Northwestern University economist Joshua Rauh, the three states with biggest unfunded liabilities as a percentage of their current tax revenues were Ohio, Colorado, and Illinois. In assessing state pension fund assets, Rauh uses a lower rate of return calculation than states use and comes up with $3 trillion in unfunded liabilities, more than twice the state and local governments' own estimates.
The potential for default has led a few experts to call for a state bankruptcy code. Cities which have gone bust are using the municipal bankruptcy code to reorganize their finances, but states don’t have this option right now. The House Judiciary Committee held a hearing on this last week but the National Conference of State Legislatures and the National Governs Association oppose the idea.
Republicans led by Rep. Devin Nunez of California and Sen. Richard Burr of North Carolina want to force states to disclose their unfunded pension liabilities using an accounting method more revealing than the one the states now use. If states didn’t comply, they’d be denied the ability to issue federally tax-exempt bonds.
No bailouts for states
Members of Congress from both parties have warned states they won’t get a bailout from Congress.
“I think we can reasonably anticipate that we may have requests made to us,” said Senate Budget Committee Chairman Sen. Kent Conrad, D-N.D. “And I can tell you, I don't think Congress in House or the Senate are going to be very interested in bailouts to states.”
Sen. Jeff Sessions, R-Ala., said at last month’s hearing with Bernanke, “Places like California have been living beyond their means for a very long time.” By contrast, he argued, Alabama “is very frugal.” He added, “I’m not inclined to ask my constituents to rescue someone who has been improvident.”
Final piece of the puzzle: politics, as you’ve seen it before. The standoff in Wisconsin and other states is the latest episode of a decades-long struggle between the Republicans and the labor unions.
In the 1990s, House Speaker Newt Gingrich and California Gov. Pete Wilson pushed for "paycheck protection" legislation requiring unions to obtain written consent from members before using their dues for political activities.
The House defeated the bill — John Kasich, now Ohio’s governor, was one of the House Republicans voting for it. And California voters rejected the paycheck protection proposal on the ballot.
One way Republicans could avoid a repeat of their 1998 defeats is the path taken by Christie in New Jersey: Portray public employees as a privileged class.
“In Wisconsin and Ohio, they have decided there can no longer be two classes of citizens: one that receives rich health and pension benefits, and all the rest who are left to pay for them,” he said Tuesday in his budget speech.
He said the burden of public employee health benefits “is growing — from 3.3 percent of the state budget as recently as fiscal year 2002 to 9 percent today — a near tripling of the burden on taxpayers to pay for these rich benefits for a privileged few.”