REFORM PUBLIC SECTOR WAGES & BENEFITS

NTF Issue Paper: ccwatch133.doc. 10-13.
NEBRASKA TAXPAYERS FOR FREEDOM ISSUE PAPER:
REFORM PUBLIC SECTOR UNION WAGES AND BENEFITS. 

BACKGROUND.  The cost to taxpayers from public sector wages and benefits, which in Nebraska and other states greatly exceeds what comparable employees earn in the private sector, combined with billions in unfunded pension liabilities for retirees, threaten city budgets.  This burden will expand exponentially in future, if city governing bodies do not stop this growth, leading to fiscal crash.  Cities like Omaha suffer heavy indebtedness, unions the root of the problem.  Taxpayers see larger and more expensive and inefficient government, many officeholders fearful to confront strong unions.  These unions are the strongest challenge facing our state and local officials and will dominate urban and state politics for many years unless confronted.  City public sector unions have grown tremendously.  The Bureau of Labor Statistics in 2009 reported that more public sector employees than private sector employees belonged to unions.  Unionized workers now are more likely trash collectors, cops, firefighters, or city clerks than carpenters or electricians. In local government, government is the monopoly provider of local services, thus eliminating free market pressures that would restrain union demands.  Furthermore, contract negotiations in local government rarely seem highly adversarial.  Government negotiators have no responsibility to shareholders and boards of directors and do not risk their salaries or jobs.  So, they do not bargain tough with unions.

UNION INFLUENCE.  Utilizing the electoral process, public unions can exert much greater influence over local officials than private unions.  By their membership political activity and huge contributions, they help elect the officials who act as management personnel in contract negotiations, thereby selecting the people who sit across from them at the  bargaining table.  In collective bargaining with public unions, officials cede control of affairs to unelected labor leaders.  Policy choices become settled between officeholders and unions instead of originating with elected representatives. Public union pressure leads to more government spending and higher pay and benefits than the private sector for jobs. A 2012 USA Today report stated that since 2002, for each $1 per hour pay hike, public employees have received $1.17 in higher benefits, while private employees saw only a 58c increase.  Over years, such negotiations point public policy in directions opposed by voters, but once implemented, these policies become difficult to reverse, because newly-elected city leaders wanting to reform the process find themselves shackled by labor contracts that unions received easily from predecessors.  Massive union membership and large war chests offer unions huge power that permit them to affect policies and block reforms they dislike.  These unions weaken public finances and the responsiveness of local government.

NTF SOLUTIONS.  Legislatively prohibit public sector unions from making direct political contributions to candidates, the same limitation applied to corporations.  State legislation could permit public unions to bargain only regarding salary and wage benefits, not pensions.  Petition the state legislature to ban collective bargaining by public sector unions.  Government employees still would have many job protections under civil service laws.  Their ability to unionize is not a fundamental or constitutional right, only allowed by most states and localities for several decades.  Appeal directly to the electorate by placing a referendum on collective bargaining  on the local ballot. Emergency financial managers could alter or terminate union contracts in order to help avert a local government fiscal crisis.  Bring compensation in line with the private sector.   Reduce unfunded liabilities by using the same kind of accounting principles government requires from the private sector.  Eliminate  longevity pay, payments for sick leave accumulated upon termination or retirement, and automatic cost-of-living adjustments.  Adopt performance and merit pay plans.  Fight for the right to transfer a worker to any position in any department.  Require union members to contribute at least 30% of the cost of health care premiums for themselves and dependents.

ITEMIZED NTF SUGGESTIONS.
WAGES:

  • Institute a total compensation study to compare city wages and benefits with those in the private sector to ascertain if employee costs are commensurate with work performed.
  • Insist on permanent and temporary wage concessions from employee unions and non-union workers.
  • Play hardball.  Unions must understand the current economic climate and agree to major concessions to avoid furloughs and /or permanent layoffs.
  • End longevity pay, which spikes salaries.
  • Bargain down overtime pay.  Urge depts. to do a more precise job of matching their work forces to their work loads, in order to cut overtime expenses.
  • No overtime counted for holidays worked.
  • No holidays for employee birthdays or on 9-11.
  • No cashing out hours in the special time-off bank.
  • Stricter accounting for bonus and specialty pay, so that correct amounts paid.
  • Tighten labor contracts to avoid wage adjustments during the fiscal year.
  • Contract with a private law firm specializing in labor negotiations to handle city union negotiations.
  • End automatic pay escalators in labor contracts.
  • End union hardship hours used as leave time.
  • Reform the paid time off formula. 
  • Repeal the city artificial minimum living wage ordinance.
  • Use the current Human Resources Association of the Midlands statistics book to gauge how city wages, salaries, and benefits compare with those in the private sector.

BENEFITS:

  • End employee tuition reimbursements.
  • Require part-time employees to pay for part of their benefits. 
  • Closely scrutinize disability payments.  Employees sometimes retire with full disability and own businesses and work full time because of generous disability pensions for fake injuries.
  • Require that money earned for work performed by employees retired for disability reasons from the city offset city disability payments. 
  • Investigate if a disability insurance policy would cost less than the millions in current annual payouts.
  • The Finance Dept. estimated that employee health care eventually will consume 50% of the general fund budget, unless tough negotiations occur with city unions.[1]  Require employees to pay at least 30% of health care premiums, as do many other government employees.
  • Require employees to pay higher health care premiums for themselves and dependents.  State of NE employees pay 21% of their health insurance premiums, federal employees pay 28%, and university employees pay 20%. Implement it sequentially, an increased percentage each year.
  • Whittle the number of health care plans to one.
  • Negotiate a sequential increase in insurance premium-sharing.
  • Raise health insurance deductibles and co-insurance limit. 
  • Offer health care coverage for retirees only over age 55.
  • Age-rating would provide additional health care savings in either a fully subsidized program or in cost-sharing of premiums, common in the private sector. 
  • Allow city employees to take a distribution from their deferred compensation plans and use these pre-tax dollars to pay for health care costs without incurring a tax penalty.
  • Permit elective rollover of sick leave into a health care account on a pre-tax basis.
  • Emphasize preventive care and wellness options through incentives or surcharges.
  • Provide information and resource places to retired city employees about how to reduce costs and improve their health care quality by using generic drugs and wellness and fitness programs.
  • Lower premiums for non-smokers.
  • Consolidate with other cities or local government entities into a larger insurance pool.
  • The mayor and city council should negotiate union contracts at the annual budget process time, so that taxpayers will have more leverage in stopping wage inflation. 
  • Insist on a drug price list from all bidders.  The city cannot audit itemized spending without a price list and auditable invoices. 
  • Perform a background check on prescription drug bidders to verify their records. 
  • Civilian employees pay only up to $5 for generic prescriptions and should pay more.  The city bidding policy on prescription drugs has not controlled health care spending, so negotiating terms would work better.  NE K-12 schools and the NE Assoc. of County Officials already negotiate. 
  • Raise the co-pay for brand-name and generic prescriptions. 
  • Raise the deductible amount for prescription cards for employees and families. 
  • Verify that the city is not absorbing markups on medical and drug claims while providers pay less and fail to pass along the savings. 
  • Closely verify eligibility of dependents at policy enrollment time. 
  • Lobby state senators to introduce legislation to allow the city to reform its retirement plan structure. 
  • Move from a defined benefit retirement plan to a defined contribution plan (initial conversion will require substantial banking of funding). 
  • Prohibit city employees from accessing full pension benefits until age 60.
  • Current workers could choose to earn lower pensions in the future or pay more now to continue earning the current  pension amount. 
  • Require employees to work longer to earn the same amount in pensions.
  • Reduce annual cost-of-living adjustments from a current percentage to a lower percentage.
  • No pension monies based on time employees conduct union business. 
  • Disallow padding in pensions by overtime earned.
  • Ratchet down supplemental pension and retiree COBRA health insurance costs. 
  • Remove the incentive for early retirement.  The retiree health insurance unfunded actuarial liability is over $300 million.  The largesse bestowed persuades many more to take early retirement, so the city is paying premiums on more retirees plus their replacements.  Early retirement causes the city to lose many of its knowledgeable and veteran employees. 
  • Base pension payments on longer periods of base pay. 
  • Establish a minimum retirement age of 62 for all civilian employees.
  • Pensions must increase only up to the consumer price index rate of inflation for an urban Midwest area. 
  • Pension supplements granted after retirement should reflect the consumer price index rate of inflation for an urban Midwest area. 
  • For pensions, change the final average salary calculation to 5 yrs. base pay for civilian employees and 3 yrs. base pay for fire and police employees.
  • Establish an option for a cash-based paid time off system for pensions. 
  • Allow employees to invest their own money in retirement accounts that they own.  These accounts could pay for health insurance and medical expenses after they retire.
    City Charter states that pension contributions from employer and employees will be “essentially equal” but are not.
  • Require city employees to pay more for the cost of term life insurance policies. 
  • Emphasis wellness and preventative programs.

Pension Alternatives:
Adjustable Pension Plan
= An Adjustable Pension Plan (APP) is a modified defined-benefit plan.  The benefit received annually adjusts from an original multiplier based on the previous year investment performance.  Thus, employers and employees share investment risk.  There also is a minimum guarantee of income.  This plan has a 1% contribution from the employer, 1% towards a defined-contribution plan, and a 4.6% employee contribution to the APP.  The plan bases on Social Security, improves portability and sees limited risk.  It establishes a predictable income stream for retirees. Since 2011, APPs have flourished in the private sector, including the New York Times Company.  Businesses believe that it meets all workplace needs and is a fine recruitment and retention attraction.
Cash Balance Plan = This plan combines elements of both defined benefit (DB) and defined contribution (DC) plans.  As a DB plan, contributions from employer and employee pool under professional management.  However, the benefit bases on the amount accumulated in the account, not on a formula based on salary and service years.  Members receive a guaranteed rate of return, but it yields lower annual payouts than a traditional DB plan.  In reality, a cash balance plan eventually turns savings into an annuity, with a minimum rate of return guaranteed by an employer.  Though guaranteeing a return, employers see much lower future liability.  The State of NE changed to cash balance in 2003, mandatory for new employees and optional for others.   State employees who would have retired during the recession under a DC plan postponed retirements, because their account values plummeted.  Such did not happen to cash balance plan recipients, who garnered a 5% return.  Kansas and Louisiana both have moved to cash balance plans for future employees.

 

 



[1] Mayoral forum, July 27, 2011.

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