Does Obama Know Why the Public Sector Isn’t ’Doing Fine’?

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On Friday President Barack Obama spoke about why the economic recovery has been so slow. People are focusing on his gaffe -- saying “the private sector is doing fine” -- and Ezra Klein admonishes us to focus on the president's substantive point, which is that job losses in the public sector have undermined the recovery overall.

Unfortunately, Obama didn’t mention a major barrier to job growth in the public sector -- and neither did Ezra: unsustainable compensation structures. This problem existed before the recession, but it’s gotten worse during the recession, because public pension systems are designed to have very rapid rises in current-year cost in the years following a recession.

Take a look at the attached chart from San Jose, California. As you can see, San Jose had an average of 7.5 employees per 1,000 residents from 1986 to 2005, and never dropped below 7.0. But in the last two years, that ratio has cratered -- to 5.6 per thousand this year, with further cuts expected next year.

This is partly because revenue has risen only modestly, with general fund receipts rising 19 percent in a decade. But the main reason is that costs for a full-time equivalent employee are astronomical and skyrocketing. San Jose spends $142,000 per FTE on wages and benefits, up 85 percent from 10 years ago. As a result, the city shed 28 percent of its workforce over that period, even as its population was rising.

A lot of that increase is due to rising required pension payments, as the assets in the city’s pension funds have lost value. But much also had to do with what Mayor Chuck Reed, a Democrat, describes as “irresponsible policy actions” over the last 15 years. Here’s his list:

1. Giving out raises faster than revenues were growing.

2. Giving out raises and increasing benefits when revenues were falling.

3. Giving out raises and benefits retroactively.

4. Allowing employees to cash out unlimited amounts of sick leave when they retire.

5. Providing lifetime health care for retirees.

He also notes that “the City Council and outside arbitrators also significantly enhanced retirement benefits. The maximum benefit for public safety employees grew from 75 percent of final salary to 90 percent, and a guaranteed 3 percent cost-of-living adjustment was awarded to all employees.”

In other words, the city made a lot of promises that it could barely afford when times were good, and now that times are bad, it really can’t afford them.

So, why doesn’t San Jose just take away some of these generous benefits so it can afford to hire? Well, Reed is trying. But California law makes it easy to give out a pension sweetener and very hard to take one away. And binding arbitration laws make it difficult for the city to claw back benefits from police and fire workers.

Reed and San Jose’s City Council have declared a fiscal emergency, and used that declaration in order to put a referendum before voters that would sharply cut the pension benefits that workers (even those on the payroll today) earn in the future. That proposal passed on Tuesday with 70 percent of the vote, but the city’s public employee unions are suing to block its implementation.

Obama is right that it’s a problem that states and cities can’t afford to expand or retain their workforces. If the president wants to know why state and local governments can’t afford to hire, he could start by asking his own supporters in public employee unions.

Josh Barro is a contributor to the Ticker and a fiscal-policy analyst based in New York.

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