The Great California Government Union Swindle

Are government employees overpaid? A six-part Bloomberg report answers that question with a resounding “Yes.” It also singles out one state as the biggest spender by far: California. This isn’t a case of a handful of isolated incidents. The team of Bloomberg reporters found a pattern of fiscal irresponsibility characterized by:

• Lack of control in overtime pay and unused vacation time payouts;
• Lack of coordination among state agencies which in one instance launched a costly salary bidding war for qualified personnel; and
• Compensation for pension fund managers that bears little relation to performance.

Government employee unions supported many of the policy changes that have led to the Golden State’s current mess. During his first tenure (1975-1983), Governor Jerry Brown gave state employee unions the right to collectively bargain, greatly increasing their ability to gain more generous compensation — which makes a Brown spokesman’s assertion that, “Governor Brown is busy fixing the many problems that he inherited from past administrations” oddly ironic. (Interestingly, local government employees had been granted collective bargaining privileges by Brown’s Republican predecessor, Ronald Reagan.)

However, it would take the next Democratic governor to really put the state in hock to the government unions. In Gray Davis, the unions found a compliant ally willing to break the bank for them. It led to a public backlash against Davis, who in 2003 became the first U.S. governor in 82 years to be recalled by voters. But the damage had been done. In the first part of the series, Bloomberg’s Mark Niquette, Michael B. Marois, and Rodney Yap note:

One of the first goals of state employee unions when Davis took over in 1999 after 16 years of Republican governors was to unwind curbs on pensions put in place by Governor Pete Wilson in 1991. Workers also wanted broad wage increases.

Unions persuaded the California Public Employees’ Retirement System to sponsor legislation called Senate Bill 400, which sweetened state and local pensions and gave retroactive increases for tens of thousands of retirees. Highway-patrol officers were granted the right to retire after 30 years of service with 90 percent of their top salaries, a benefit that was copied by police agencies across the state.

California’s annual payment toward pension obligations ballooned to $3.7 billion in the current fiscal year from $300 million when the bill was enacted. Some cities that adopted the highway-patrol pension plan later cited those costs for contributing to their bankruptcy filings.

But that was just the beginning.

The pay deal for the California Highway Patrol got the attention of the state’s politically potent prison guards’ union, which successfully lobbied to have its compensation tied to that of state troopers.

The result was a pay increase of more than 30 percent for members of the union over the five-year contract. The state’s auditor, Elaine Howle, in July 2002 estimated the contract cost taxpayers an extra $500 million a year.

The prison guards’ union gave Davis more than $3 million for his various elections, including $250,000 a few weeks after the pay increase was negotiated, campaign records show.

Medical personnel got their slice as well.

Union-negotiated rules required state departments to handle the extra work by offering overtime to California nurses before bringing in contract nurses from private companies. The requirement led to a greater reliance on overtime for nursing in California than in any other state, one that persists to this day.

The cost for all this? In only four years, the Davis administration managed to turn a $12 billion budget surplus into a $35 million deficit. Unfortunately, Governor Jerry Brown has made only timid moves to tackle overgenerous compensation, while spending political capital on raising California’s already-high tax rates (much to the union’s pleasure). Brown has required some state workers to take an unpaid day off each month, while they can continue to accrue unused leave. Worse, last year he gave prison guards additional days off and waived a cap on their accrued leave.

However, California’s government dysfunction doesn’t end there. Perhaps the most bizarre instance of state employee compensation spiraling out of control was due to a form of intragovernmental competition that proved harmful to taxpayers. Bloomberg’s Freeman Klopott, Rodney Yap, and Terrence Dopp note in the series’ second part:

Mohammad Safi, a graduate of a medical school in Afghanistan, began working as a psychiatrist at a California mental hospital in 2006, making $90,682 in his first six months. Last year, he took home $822,302, all of it paid by taxpayers.

Safi benefited from what amounted to a bidding war after a federal court forced the state to improve inmate care. The prisons raised pay to lure psychiatrists, the mental health department followed suit to keep employees, and costs soared.

While these are highly skilled employees and should be compensated well, a state government that has proven unable to prevent this kind of bidding war among its own agencies is failing in its basic duty of getting the best value for taxpayers. Another psychiatrist in the system summarized the situation: “Pleasant Valley Prison and Coalinga Hospital, they are next to each other. If the prison system offers more money, then people will move from the hospital to the prison.”

In the third part of the series, Mark Niquette and Martin Braun looked at the compensation of public pension fund managers in various states and found little correlation between the level of pension money managers’ pay and their performance. California isn’t the only state that pays its pension fund managers lavishly, but it’s still a leader in compensation.

The California Public Employees’ Retirement System, the largest public pension in the U.S., paid $4.1 million to 50 workers in 2011, the fund said.

By comparison, the three highest-performing funds over the past 10 years, the Pennsylvania School Employees Retirement System, Ohio Police & Fire Pension Fund and Pennsylvania State Employees’ Retirement System, didn’t have an employee paid more than $270,000, and none pays bonuses, the funds said.

In part 4, Marois and Yap look at the devastating effect of the state’s high allowances for unused leave payouts — and lax enforcement of even those — on the public fisc.

Managers and employees throughout California government routinely ignore a rule limiting accrued time off to 640 hours, or 16 weeks. The accumulation of vacation hours accelerated in California from 2005 through 2010, fueled by a state policy forcing workers to take unpaid time off, or furloughs, before using paid leave.

That requirement helped reduce short-term payroll costs and balance budgets under former Governor Arnold Schwarzenegger, a Republican, and current Governor Jerry Brown, a Democrat, while deepening the state’s future obligation.

Unused leave grew to $3.9 billion in 2011 from $1.4 billion in 2003, according to state financial reports, partly because of staff shortages and around-the-clock needs at agencies such as prisons that forced employees to put off vacations.

In part 5, Alison Vekshin, Elise Young, and Rodney Yap look focus on rising compensation in law enforcement.

Union-negotiated benefits, coupled with overtime that can exceed regular pay and lax enforcement of limits on accumulating unused vacation, allow some troopers to double their annual earnings and retire as young as age 50. The payments they get are unmatched by those elsewhere, according to data compiled by Bloomberg on 1.4 million employees of the 12 states.

This Bloomberg series gathers a lot of valuable data and is well worth reading. (Part 6 deals with the compensation of public university presidents and coaches, a somewhat different topic, since they are not subject to union rules and a significant portion of their salaries come from private donors.)  It could have included more in the area of analysis, in explaining why the destructive policies cited drive up costs the way they do — especially collective bargaining and binding arbitration.

Through their large political operations and sizable campaign contributions, government employee unions in effect help elect their own bosses. When the unions’ preferred candidates win, negotiators on both sides of the table are looking out for the unions’ interests, at the expense of taxpayers.

Binding arbitration drives up compensation mostly among public safety personnel. In several states, police, firefighters, and paramedics are barred by law from striking. It helps keep those services functioning, but at a very high price, as my co-authors, Don Bellante and David Denholm, and I note in our 2009 Cato Institute study on public sector unions, citing an example from California:

In some states, public-sector unions enjoy another privilege in the form of compulsory binding arbitration, which is intended to resolve public-sector labor disputes without disruption of public services—yet its results often hit the public purse even worse than strikes. For the unions, it is a “can’t lose” proposition, because an arbitrator will never award a settlement that is anything less than management’s final offer, so the union is guaranteed to obtain at least some of its demands and will never come out worse than the status quo ante.

There is one check on union demands in arbitration—a union’s final offer must be acceptable to the arbitrator for it to be incorporated into a new contract, but that relies on the discretion of the arbitrator, whose incentive to hold down costs is unlikely to be very strong due to his or her lack of a vested interest in the labor dispute’s outcome. The city of San Luis Obispo, California, shows how bad things can get under binding arbitration. In June 2008, an arbitrator awarded hefty salary increases to unionized police officers in San Luis Obispo. Police officers received immediate raises of 22.28 percent, while dispatchers and technicians got raises of 27.82 percent. For the average police officer’s salary, this represents an increase from $71,000 to $93,000 a year,with salaries including overtime expected to top $100,000, according to city officials. City administrative officer Ken Hampian said the increases cost the city $1.8 million above what it planned to pay. While this may be an egregious case, the mere possibility of such a scenario should make state and local governments wary of binding arbitration.

And so, California continues down its fiscal death spiral with no happy ending in sight. Yet Golden State residents shouldn’t give up hope. If heavily Democratic Rhode Island can reform public pensions and Union-heavy Michigan can enact right to work legislation, anything is possible.

California rediscover fiscal rectitude? Stranger things have happened.

For more on labor policy, see WorkplaceChoice.org.