Magazine May 17, 2010, Issue

Governor Freeze

In New Jersey, Chris Christie shows it is possible to stop rampant public-employee wage growth

Last month, Bergen County Education Association officials sent out a memo that closed with a jokey prayer for New Jersey governor Chris Christie to die.

What raised the ire of the BCEA’s leaders? Christie’s proposal to balance the state budget without tax increases by cutting $11 billion in spending, including $820 million in funding for local schools — and his call for teachers to accept a one-year pay freeze so that the funding cuts don’t result in program reductions.

A freeze might sound draconian, but the data support Christie’s position, especially in New Jersey, where teachers are especially well paid. Garden State teachers made an average of $60,000 per year in 2007, plus generous health and pension benefits, for working approximately 80 percent of the number of days that most full-time workers do. Only in California and Connecticut do teachers make more.

In the past decade, New Jersey school districts have seen sharp increases in payroll costs. From 2001 to 2009, the costs associated with wages and salaries grew 43 percent. While school enrollment grew only 3 percent over this period, school employment grew 14 percent. New Jersey schools added one new teacher for every two new students. Teachers’ wages grew slightly faster than those in the private sector, and benefit costs soared. From 2001 to 2006 (the latest year for which data are available), school-employee benefit costs increased 115 percent, in part due to sharply rising health-insurance costs. Unlike most workers in the private sector, New Jersey teachers generally did not bear any of the rise in health-insurance costs, because 100 percent of their premiums are paid by school districts.

Without a freeze, most New Jersey teachers can expect a raise on the order of 4 percent this year. If they did not receive raises, and if a just-passed reform requiring teachers to contribute toward health insurance were implemented immediately, the state would save $765 million, almost enough to offset the funding cut without raising property taxes, laying off teachers, or buying fewer textbooks and less classroom equipment.

The experience of New Jersey teachers is not unique. In fact, most public employees could be excused for not noticing the recession, given the strong employment and wage growth their sector has experienced over the past several years and continues to enjoy. Since the start of 2007, as the number of jobs in the private sector declined by 7 percent, public payrolls have seen a 2 percent increase, adding over 350,000 jobs nationally. New Jersey lost 220,000 jobs in the private sector while gaining 11,000 local-government education jobs.

In the last three years, state and local government-employee compensation grew 9.8 percent, compared with 6.9 percent in the private sector. That’s $1.43 in compensation growth for public employees for every $1.00 in compensation growth for private employees.

Those raises cost money, at a time when state tax revenues have taken a hit because of falling incomes and less consumption. For a time, states were able to close much of the gap with stimulus dollars. In New Jersey, now that the stimulus is running out, teachers’ unions are urging the extension of a “temporary” tax increase inflicted last year upon residents making over $150,000 annually, and the elimination of the school-funding cut.

As Christie noted, this tax increase (as well as teacher layoffs and cuts to spending on classroom supplies) can be avoided by means of enacting a pay freeze. An April Rasmussen poll found 65 percent of New Jersey voters support a teacher-pay freeze. But while a handful of local unions agreed to accept one, the vast majority balked at the governor’s demand. In return, Christie urged voters to reject proposed school budgets in elections on April 20. (In New Jersey, school budgets must be approved by voters annually.)

Most voters obliged him. Budgets were approved in just 42 percent of New Jersey districts, the lowest figure since the New Jersey School Boards Association started keeping records 35 years ago. Typically, approval runs in the 70 percent range; last year’s figure was 73 percent.

This signal of voter discontent could inspire efforts toward wage freezes in other states. John Flanagan, a Republican in New York’s state senate, says he will introduce legislation that would freeze employee wages at all levels of New York government — notwithstanding existing employee contracts. Such a law is likely to hold up in court; previous wage freezes in Buffalo and New York City withstood legal challenges.

#page#Like New Jersey’s, New York’s teachers have seen wage and benefit growth that outstrips that of their private-sector peers. School employees have on average gotten a 5 percent increase in wages and benefits over the last three years. A pay freeze would do much to bring the trend in public-employee compensation back in line with that of the private sector — and would help avoid the prospect of laying off teachers.

And the budget savings are substantial: A blanket wage freeze would save New York localities $1.6 billion, and New York State $285 million, in the first year. Extending the freeze for additional years would significantly slow the rise of state spending.

A pay freeze would especially help government agencies that are subject to binding arbitration, which have in some recent cases seen employees awarded unaffordable pay increases. Despite an ongoing budget crisis at New York’s Metropolitan Transportation Authority, an arbitrator last year ordered annual pay increases of 4 percent.

The average MTA worker makes $68,000 in annual wages, plus $26,000 in benefits. Commuter-rail employees make even more — fully $120,000 in total compensation. These workers are allowed to retire on full pension at age 55. To shore up the MTA’s budget, New York lawmakers recently enacted a 0.33 percent payroll tax that applies in the New York metropolitan area. But even that is not sufficient to cover rapidly growing labor costs, and the MTA is cutting service, even eliminating two lines entirely. A freeze would allow the MTA to get labor costs under control without taking these measures.

As I have noted, there is another way to pay for continuing employee raises: tax increases. Many states raised taxes last year as budget gaps grew in the recession, and in many states, employee unions are pushing for another round of tax hikes this year.

In New York, public-employee unions are pushing a tax-increase package that would take the state’s top income-tax rate to 9.97 percent (13.62 percent in New York City). This would raise, optimistically, $1 billion a year. The unions would also levy a punitive tax on bankers’ bonuses, and tax stock transactions.

In Illinois, meanwhile, unions are lining up with the governor to urge a 33 percent increase in the state’s flat income tax. And in California, public-employee unions are pushing a tax-increase package that would generate over $40 billion annually. (For comparison, California collected $115 billion in taxes in 2007.) Its centerpiece is a 55 percent increase in the sales tax; it also increases taxes on high-income earners, multinational corporations, alcohol, cigarettes, motor vehicles, and oil extraction.

But early indications are that, thanks to rising voter discontent, lawmakers’ appetite for higher taxes is waning. The Illinois legislature, despite being controlled by Democrats, appears likely to block the tax increase, just as it did last year. In California, the Democrats’ presumptive nominee for governor, Jerry Brown, says he’ll sign a tax increase only if it’s subject to a voter referendum. And when California voters were offered a chance to approve a broad-based tax hike in a referendum last year, they resoundingly rejected it. (The Republican candidates rule out tax increases altogether.)

It’s not as though California’s public employees were underpaid to begin with. The state’s teachers are the highest-paid in the country, taking home an average of $63,640 in wages (25 percent above the national average) plus benefits. Its prison guards are also the country’s highest-paid, averaging $72,000 per year in wages and overtime as of 2008, plus pension and health benefits worth tens of thousands more.

The bottom line is that wage freezes produce meaningful savings, allowing lawmakers to avoid both unpopular tax increases and unpopular cuts in programs. It is the closest thing in government to a free lunch.

Indeed, if state and local governments had simply matched private-sector wage and benefit growth for the last three years (which would have entailed giving roughly a percentage point less in annual raises), this year’s state budget gaps would be smaller by $36 billion, or roughly 3 percent of total tax collections by states and localities. A wage freeze now would likely realize similar savings in a year to 18 months.

In New Jersey, Democrats are already cooperating with Christie on reforms that are anathema to public-employee unions, including pension cuts for new employees and a requirement that all state and local employees contribute 1.5 percent of their salaries toward health-insurance premiums. Now he’s trying to get them to sign up for a local-property-tax cap that would pressure school districts (which are funded mainly by property taxes) to rein in salary costs.

With voter antipathy to tax increases high and growing, politicians in both parties are likely to find that taking on the unions is the path of least political resistance. In the next two years, watch for fiscal restraint to become New Jersey’s surprising new export.

–Mr. Barro is a senior fellow at the Manhattan Institute.

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