Sept. 26 (Bloomberg) -- The termination notice hit Irene Wilson like a sucker punch: “It is with deep regret that I must inform you,” it read, “that your position as a nurse for Connecticut Valley Hospital Merritt Hall Addiction Services, Division of Mental Health, is being eliminated.”
Wilson, 56, received the pink slip after Governor Dannel P. Malloy, a Democrat, ordered 3,000 job cuts in July when unions failed to approve concessions to help fill a $3.26 billion projected deficit in the state’s $18.7 billion general-fund budget for fiscal 2012.
“It was hard not to get caught up in all the what-ifs,” Wilson, who helps wean indigent residents off alcohol, valium and heroin, said in a telephone interview from Middletown. “What if I can’t pay my mortgage? What if I can’t pay my bills?”
When union members reconsidered and ratified a revised $1.6 billion concessions deal in August, Malloy rescinded the dismissals. The governor expects the agreement to save the state $21.5 billion in employee health-care and retirement costs over 20 years. In exchange, Nutmeg State workers received protection from job cuts for four years.
Connecticut workers are among thousands of public employees nationwide forced to chose between benefit cutbacks or losing their jobs after the longest recession since the Great Depression opened gaping deficits in state and local budgets.
More Cuts Ahead
More difficult choices lie ahead. A congressional supercommittee is seeking another $1.5 trillion in deficit reduction, which may cut deeply into federal aid to states and cities amid an already slowing economy. Proposed automatic spending cuts would trim an estimated $133 billion that would be headed to states over the next decade.
“This is far worse than anything we’ve seen before,” Steven Kreisberg, collective bargaining director for the Washington-based American Federation of State, County and Municipal Employees, said in a telephone interview. “There are a lot fewer public servants providing services at a time people need services more than ever.”
The downsizing of state and local government workforces and moves to trim their benefits and collective-bargaining power sparked a politicized debate over whether generous public-employee pay packages contributed to record budget deficits.
Unions and Costs
Republican governors in Wisconsin, Ohio and New Jersey argued fixing ailing budgets required reining in unions. Labor representatives said they were unfairly targeted in part because they give generously to Democrats.
“There’s been nothing like this since the ‘60s and ‘70s when most states passed laws giving public-sector unions rights to bargain,” said Joseph Slater, who teaches labor law at the University of Toledo in Ohio. “2011 by far has seen the most dramatic changes in collective-bargaining law.”
Battles over whether public employees -- about 36 percent of whom are union members, compared with 7 percent of nongovernment workers, U.S. Labor Department figures show -- have the right to negotiate over wages and benefits may continue in coming months in Ohio, Michigan and New Jersey.
More givebacks and job losses may be on the horizon, with several states, including Washington and Florida, recently reporting quarterly revenue fell short of forecasts after waning consumer spending led to declines in sales-tax receipts.
No More Shocks
State and local officials say their budgets can’t withstand further shocks, such as a reduction in federal aid being considered by the 12-member congressional supercommittee. They say they’re banking on stimulus money from President Barack Obama’s $447 billion American Jobs Act.
“Our state government has made cut after cut, forcing our local school district to layoff teachers and administrators,” said Seattle Mayor Mike McGinn, a Democrat, on a Sept. 16 conference call with reporters. “They will likely have to layoff more as we go into this next round of budget cuts if we don’t receive more stimulus money.”
Washington state must find $2 billion to cut from its $32 billion two-year general-fund budget, precipitated by falling sales-tax collections.
Slowing consumer spending cascaded through the economy in the past four years, leading to the worst tax declines in a half century and state budget gaps totaling $510.5 billion, according to the National Conference of State Legislatures in Denver.
To close these gaps, governors and mayors increasingly turned to their workforces, whose salaries and benefits represent about 20 percent of state spending and 55 percent of local government costs, according to the Center on Budget and Policy Priorities, a nonprofit research organization in Washington. The group focuses on issues affecting lower-income Americans.
About 480,000 state and local workers have lost jobs since December 2007, according to U.S. Labor Department data.
Last year brought the largest combined reduction in state and local-government employment since federal economists started collecting labor statistics in the 1950s, Jeff Thompson, an economist at the University of Massachusetts in Amherst, said in a telephone interview.
“It’s all the kindergarten through 12th grade teachers, all the cops, public higher-education folks, jailers and judges,” Thompson said. “You start to add it up, it’s a pretty important part of our economy.”
State and local positions make up one of every seven jobs in the U.S., Thompson added, which explains why a 29-month run of almost continuous cuts at the municipal level continues to be a drag on the economy.
The job losses, coupled with unprecedented benefit givebacks by public employees, are curtailing consumer spending and tax receipts in many states, contributing to the very budget deficits they were designed to ameliorate, labor economists agree.
“The cuts create a damaging paradox,” Harley Shaiken, a labor professor at the University of California, Berkeley, said by e-mail. “Givebacks and layoffs today dampen consumer spending tomorrow, which, in turn, creates the danger of a downward economic spiral.”
Some analysts say that bringing public employees’ generous benefit packages including health-care coverage in line with those received by industry peers is an effective way for governments to save money.
“Governments going to employees and requiring them to pay a higher share of their premiums makes a lot of sense because generally they tend to pay a lower share than the private sector,” Josh Barro, a senior fellow at the New York-based Manhattan Institute, said by telephone. “There’s still a lot of savings available.”
Government workers contribute, on average, 15 percent of overall insurance premiums, Barro said in “Cadillac Coverage: The High Cost of Public Employee Health Benefits,” and published by the organization, which espouses ideas that “foster economic choice and individual responsibility.” The rate compares with about 25 percent of health costs covered by nongovernment workers, he said. Public employees also tend to have lower co-payments and deductibles, he said in the report.
Other economists disagree, saying it’s not right to cut benefits when public employees earn 10 percent less than their counterparts in industry.
Jeffrey Keefe, who teaches at Rutgers School of Management and Labor Relations, said in a telephone interview that averaging public employees’ benefit packages and wages shows they earn 3 percent less than comparable nongovernment employees, when controlling for education and experience.
Aiming at Labor
Public worker benefit packages were targeted by at least 44 states and the District of Columbia over the past four years to reduce labor costs by cutting jobs, forcing workers to take unpaid time off and by imposing hiring freezes, according to a Budget and Policy center report.
In 2010 alone, 11 states, including Colorado, Minnesota, Missouri and Virginia, increased the amount employees must contribute to their pension plans, the center said in another report. In 16 states, obligations for future benefits were reduced, according to the organization.
To contain escalating health-care costs, New Jersey and New York increased workers’ contributions for their health-insurance coverage. Indiana, Massachusetts and Wisconsin also implemented cost-saving measures to state or local health plans.
Local Job Cuts
Municipalities were forced to take similar steps, although benefit cutbacks at the local level are more difficult to quantify, academics say.
In Denver, where employee costs comprise 70 percent of municipal spending, officials grappled with $346 million in budget shortfalls in the past three years by leaving 750 positions -- about 7 percent of the total workforce -- unfilled, said Ed Scholz, deputy chief financial officer. The city also imposed unpaid time off, froze wages and required employees to pay more for health-care benefits.
Whether public employees got a say in how their benefits were cut depended on if they had unions and if their state had collective-bargaining laws letting workers negotiate contracts.
States including Connecticut and New York curbed labor costs and narrowed budget gaps by negotiating for concessions.
Others including Wisconsin secured concessions in part by curbing union power. Wisconsin took center stage in the battle between unions and lawmakers led by Republican Governor Scott Walker earlier this year when the Legislature voted to strip public employees of most bargaining rights.
“I’ve learned over time that it works,” Walker said when asked what he had learned from his confrontation with the unions at a Republican Governors Association meeting in July.
“We had a $3.6 billion deficit, and we turned it into a $360 million surplus,” Walker said. “It provided savings not just for this budget, but structural, long-term savings.”
Wisconsin’s law also requires public employee unions to seek recertification every year -- a step union leaders decided on Sept. 22 not to take because of the cost. The move effectively ensures that state government managers are no longer obligated to bargain with labor groups.
In states including Texas and South Carolina, laws already restrict employee bargaining power.
“In these cases, the state can cut wages and health-care benefits and change pensions unilaterally,” Gary Chaison, who teaches industrial relations at Clark University in Worcester, Massachusetts, said by e-mail. “This is much faster and easier than insisting on concessions during bargaining.”
How much deeper cuts to state and local workforces go depends in part on if the congressional supercommittee targets the $500 billion that the federal government provides to states. If lawmakers can’t agree on at least $1.2 trillion in savings, automatic cuts would be triggered, with half coming from defense spending.
In this scenario, states could lose the $133 billion in federal money that goes to programs including education, rent support for the poor and homeland security, according to Federal Funds Information for States, a service of the National Governors Association and the State Legislatures conference.
Governors and mayors, who exhausted economic-stimulus funds from Obama’s 2009 American Recovery and Reinvestment Act this year, say they need Congress to pass the president’s jobs plan, which includes $35 billion to keep teachers, police and firefighters employed.
“If we have to go through another round of budget cuts because Congress is unable to address the jobs problems we face in our community, we will very surgically look at where those cuts will have the least impact,” Salt Lake City Mayor Ralph Becker, a Democrat, said in a Sept. 16 conference call with reporters. “But the cuts will undoubtedly include everything from public safety to whether our parks will have their grass cut.”