The Agenda

Josh Barro on Public Sector Labor Reform in Wisconsin and Indiana

To fully understand the impact of Act 10 on Wisconsin’s public finances, I strongly recommend reading a new report from the Manhattan Institute by Josh Barro released late last month, “Comparing the Impact: Public Sector Labor Reform in Wisconsin and Indiana.” One of the key points Josh makes is that Act 10 is a reform that will have a long-term impact as collective bargaining agreements expire across the state. Yet for now, its impact has arguably been outweighed by cuts to local aid and property tax restrictions that constrained resources for cities and towns across Wisconsin. 

The clearest illustration of the potential power of Act 10 is the difference between cities and towns that had legacy labor agreements in place and those that were free to change the terms of public employment under the new law:

The budget repair law experience has not been uniform across the state of Wisconsin. Some jurisdictions that are not encumbered by legacy labor contracts were able to achieve significant savings right away due to the budget repair law, and were not forced to make sharp reductions in employment—some, such as the City of Milwaukee, were even able to expand public services.

Milwaukee lost $14 million in annual aid payments from the state, but found $30 million in employee benefits savings, of which $20 million was made possible by the budget repair law. These savings came mostly from changes to health benefits: partly requiring employees to pay a larger share of their insurance premiums, and partly switching to more economical plans. This is an example of what Wisconsinites can expect to see in cities and towns across their state in the next few years.

But other jurisdictions that must honor existing contracts have had very different experiences. Take, for example, the Milwaukee Public Schools. The district lost $82 million in state aid. But it was not able to realize any health care or pension savings with unionized employees, because it entered into a four-year employee contract at the end of 2010. As a result, the district laid off 119 teachers and over 100 other employees.

This situation is difficult, but temporary. There will be significant labor savings available to the Milwaukee Public Schools starting in 2014 when existing contracts expire. Employees will make larger pension and health contributions, and the district will have a free hand to modify health benefits.

Those savings, when realized, should be substantial. A recent study found that even simply moving MPS employees into the same health plan used by state employees would save $64 million per year, enough to nearly wipe out the loss of state aid.

Over the next three years, municipal governments will begin taking advantage of labor reforms, and we can expect their ability to maintain or expand headcount to improve. Over time, the City of Milwaukee experience will move from unusually fortunate to typical—much as we’ve seen with how Indiana governments have weathered the recession. [Emphasis added]

Josh goes on to offer a detailed account of how Indiana has fared in the six years since Gov. Daniels abolished collective bargaining for state employees that is worth reading carefully.

In Keeping the Republic, Gov. Daniels explained why he abolished collective bargaining in considerable detail:

In Indiana our actions were only secondarily about finances. It is true that the freedom to restructure departments, consolidate functions, and so on saved Hoosier taxpayers tons of money. But the principal motive, and equally important gains, came in the transformation of state services. There simply was no way we could have revolutionized our Bureau of Motor Vehicles (more on this later), our state parks, our prison system, or so many other services if we had been hogtied by the old union agreement.

One of the most important changes this new freedom allowed involved the protection of children, one of the few literally life-and-death duties state government has, and one that Indiana was failing miserably at when my administration entered office. By almost every measure, Indiana had one of the worst child welfare systems in the country. Rates of child fatality and abuse in the system were shockingly high, and the average caseworker was overwhelmed with twice as many cases as the national average. There was tremendously high turnover among caseworkers, and incoming workers were rarely trained properly. At the same time, we had one of the poorest records anywhere of collecting child support for single parents. Only one of every two dollars in support ordered by a court was ever delivered to a single mom (or, occasionally, dad) in Indiana. …

Six years later our child welfare system was winning national awards from private evaluators, such as the Annie E. Casey Foundation, and from the same federal Department of Health and Human Services that was preparing to penalize the state for maintaining an atrocious system before we took office. Today, 60 percent of single parents who are owed child support in the state receive it. That’s a significant improvement—although it is not nearly enough, so I continually press for more progress.

Fixing the department required making thousands of organizational, process, and personnel changes. Hundreds of workers either were reassigned or, in some cases, dismissed for poor performance. The agency of 2011 looks totally different, and operates in a totally different way from its predecessor. If every one of these steps had required union consultation or signoff, as the old agreement provided, we would still be trying to take some of the earliest actions. [Emphasis added]

As Stephen Smith often argues, the control unions exert over work rules is actually far more important than the leverage they have over setting wages and benefits, as work rules essentially determine staffing levels. To the extent other states pursue public sector reform, I might even recommend a strategy that focuses on just two pillars: end mandatory dues collection and end collective bargaining over work rules. Though collective bargaining over wages and benefits isn’t ideal, these two measures alone would help give public officials the freedom to revamp public sector agencies so that they can deliver services more efficiently. To be sure, public employees continue to exert a great deal of authority via the ballot box, even without collective bargaining. But these measures can help reduce their outsized influence. 


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