Push Has Come to Shove in Some California Cities
By Peter Gordon • Friday June 8, 2012 2:23 PM PST •
It seems that push has come to shove in some California cities. The Stockton City Council voted to give its City Manager the green light to file for bankruptcy—which could address the problem of that city’s debt, now thought to be in the range of $25-40 million. The City’s diminished income is not up to such amounts. And last Tuesday, the voters in San Diego and San Jose took an even bigger step by addressing expenditures and voting to cut the pension benefits of city workers. Both cities’ votes were by wide margins; San Diego’s passed with 66% and San Jose’s by 70%. The New York Times (June 6) noted that these budget moves were of a nature that, “. . . governments traditionally avoid: moving to cut not just the benefits of future hires, but also those of current city workers, whose pensions generally have much stronger legal protections than those of private-sector workers.”
While economists point to “sticky wages” that limit labor market adjustments in bad times, compensation packages can only remain sticky for so long. Not only have there been lay-offs in many cities, but now there are also pay cuts. Voters and leaders in other cities have noticed.
The latest California developments are auspicious and a clear departure from politics as usual. Most politicians have short time horizons. Always-looming elections tempt them to be generous with supporters and constituents; they are prone to invoking rosy scenario budgets that seemingly make it all work. And they have been able to get around the constraints imposed by budgets and borrowing restrictions by making commitments to city workers in terms of promised (but usually underfunded) pension benefits. The formal research corroborates this view. Chris Edwards has published a study (2010) which shows that public sector unions push up public sector labor compensation costs by eight percent on average. He argues that California is above average. In a recently published academic paper, U.S. Bureau of Labor Statistics economists Maury Gittleman and Brooks Pierce ask “Are state and local government workers overcompensated?” The authors acknowledge the complexities of the apples-vs.-oranges comparisons and work to overcome them. They find that, “After controlling for skill differences and incorporating employer costs for benefits packages, we find that, on average, public sector workers in state governments have compensation costs 3-10 percent greater than those for workers in the private sector, while in local government the gap is 10-19 percent.” John Matsusaka (2007) has found that, “When public employees are allowed to bargain collectively, wages are about 18 percent higher.”
Like most people, investors experience mood swings. They can be too sanguine in good times and too pessimistic in bad times. This accentuates the boom-bust cycles that markets experience. But the same happens in the public sector. Politicians see revenues grow and are happy to fund questionable programs and projects.
The boom-bust now being experienced here and abroad will some day sort itself out. But what then? Will local governments fall into the old trap of making foolish commitments to favored constituencies in good times? Or will voters as well as elected officials be a little chastened?
Size and scope have to be re-thought. Anything that can be metered can be privatized. Modern technologies make metering easier than ever. (The UCLA faculty senate recently voted to privatize that school’s MBA program.) This is the worst time to discourage private efforts in infrastructure or in social services. Over the past decade, California-based foundations gave away $6 billion—in spite of two recessions. There are many wealthy and generous people in California. Peter Diamandis and Steven Kotler (in their recent book) report a quadrupling of active foundations in the U.S. over the last twenty years. Philanthropists should consider social services innovations prizes, perhaps modeled on the X-Prize for scientific innovations. Charles Murray manages to end his doleful analysis in Coming Apart on an optimistic note, citing Nobelist Robert Fogel’s The Fourth Great Awakening (2000) which includes the rise of philanthropy in America geared to promoting equality of opportunity.
These trends point the way to a re-evaluation of state and local government size and scope. There are ways to separate various infrastructure and social services from politics.