Public Servants Live Better than the Public Itself

Published February 1, 2006

For 50 years, public-sector unions, health care lobbyists, and social services advocacy groups have doggedly been amassing power in state capitols and city halls, using their influence to inflate pay and benefits for their workers and to boost government spending. The bill for that influence is now coming due, and it is overwhelming state and local budgets.

  • In New Jersey, legislators wooing union votes in 2001 approved a 9 percent hike in already-rich pensions for the state’s 500,000 public workers, even though a falling stock market was shrinking pension fund assets. Today, those new perks have added $1 billion to Jersey’s deficit-riddled budget and will add another $4.2 billion over the next five years.
  • In Washington state, the powerful teacher union led a successful 2000 effort to win legislation mandating smaller class sizes, promising it would cost taxpayers nothing because surplus revenues could cover the program. In 2005 the cash-strapped state passed legislation levying $500 million in new taxes to finance the mandate.
  • In California, then-governor Gray Davis (D) and a union-friendly state legislature passed a series of bills that swelled the number of state employees who could claim disability retirement benefits and also expanded the number of ailments automatically classed as job-related to include HIV, tuberculosis, and lower back pain. The flood of new disability claims will cost the state’s retirement system some $465 million over five years, much of which will come out of taxpayers’ pockets.

States Feel Fiscal Hangover

Such extravagances help explain why state and local government spending reached an all-time high relative to national GDP during the 2002 recession, producing a fiscal hangover that continues today. Now, even in an expanding national economy with tax revenues surging once more, state and local budgets teeter in precarious balance, long-term deficits pile up, and politicians hike taxes to close spending gaps.

The tidal wave of local government spending that produced this crisis built up as tax revenues poured into state and municipal coffers during the 1990s boom. State tax collections rose by 86 percent, or about $250 billion, from 1990 through 2001, while local property tax collections soared by $90 billion, or 60 percent, during a period when inflation increased by a mere 30 percent. Rather than give surpluses back to taxpayers, government went on a spending spree, lavishing opulent pensions on employees and expanding politically popular health and education programs.

Government Workers Gain Clout

Unions and social services groups were perfectly positioned to funnel this flood of surplus tax revenues into their pockets rather than back to the taxpayers. Starting with virtually no representation in the public sector 50 years ago, unions have relentlessly organized workers, so that in some states as many as 60 to 70 percent of public employees now are members.

As a result, these unions wield huge clout at the ballot box, and union dues give them vast resources to sway public opinion and influence legislation. Gradually, public unions have aligned with local social services and health care groups that federal (and later, state and local) government began funding heavily during the War on Poverty of the 1960s and early 1970s, creating a new class of organization that lives off government money.

Pension, Health Costs Climb

The buildup of two benefits in particular–pensions and health care–is now producing major budget disasters nationwide. State and local governments used tax surpluses and the 1990s stock market rise to gold-plate pension programs, with disastrous effect once the stock boom ended.

Pension costs in California’s state budget skyrocketed 14-fold, from $160 million in 2000 to $2.6 billion in 2005, and are headed to $3.6 billion in 2009. New Jersey’s pension costs are rising so quickly that without reform they will consume 20 percent of the state budget in five years, up from 8 percent this year. Illinois’ state budget pension obligations will reach $4 billion a year by 2010, which could make them a bigger share of the state budget than local aid to education.

The pensions for which taxpayers must now foot the bill far outshine what many of taxpayers in the private sector receive. In New Jersey, for instance, a 62-year-old state employee who retires after 25 years gets 50 percent more in yearly pension payments than an employee retiring with the same salary from the Camden, New Jersey plant of Campbell Soup, a Fortune 500 company, according to the Asbury Park Press.

In addition, the state employee receives free health insurance for life, to supplement Medicare, while full health benefits for private-sector retirees are now rare. In California, a public employee with 30 years of service can retire at 55 and receive 60 percent of his salary, and public safety workers can get 90 percent of their salary at age 50.

By contrast to these rich payouts, the small (and shrinking) number of private firms that still provide “defined benefit” pension plans–instead of the now-common “defined contribution” plans that transfer all risk to the worker–pay on average 45 percent after 30 years of service.

Perks Pile Up

Retired public employees in many states also get cost-of-living adjustments to their pensions, which those private-sector workers who still have defined benefit plans rarely enjoy. In Illinois, for instance, where pension payments increase by 3 percent each year–faster than the rate of inflation for most of the past decade–an employee who retired 10 years ago with a monthly pension of $4,000 would now be collecting $5,400 a month.

Features unheard of in the private sector drive up government pension packages still further. In New York and Oregon, for example, public employees who contribute their own money to retirement plans get a guaranteed rate of return that is often far beyond what the market provides, and taxpayers must make up the difference. In Oregon, the return is 8 percent annually–about double what safe investments like Treasury bonds provide today.

Teachers Well Paid

Unions also have convinced Americans that teachers are underpaid, when in fact they now take home considerably better pay packages on average than professional workers in the private sector.

The federal government’s national compensation survey estimates local public school districts pay teachers an average of $47.97 per hour in total compensation, including $12.39 per hour in benefits–figures that far outstrip not only what private school teachers earn, but also the average of what all professional workers earn in private business, a category that includes engineers, architects, computer scientists, lawyers, and journalists.

The education lobby’s success most clearly shows up in the stunning growth of U.S. public education spending. In the past 30 years, per-pupil spending has nearly doubled, after accounting for inflation, to about $10,000 a year–far more than in most other industrialized countries, according to the Organization for Economic Cooperation and Development (OECD), whose latest figures show the United States outpaces Germany in per-pupil spending by 66 percent, France by 56 percent, and the United Kingdom by 80 percent. Even so, American students rank only in the middle of countries on student achievement tests, the OECD reports.

Health Care Costs Skyrocket

With so much money available from Medicaid, one of the original War on Poverty programs, health care has become an increasingly government-financed business and has been transformed unrecognizably in the process. Coalitions of hospital administrators, nursing home operators, health care unions, and advocacy groups–strange bedfellows indeed–have emerged as powerful state and local political players, using their muscle to extract ever-higher Medicaid spending and more expansive coverage.

Since 2003, Medicaid has surpassed even education funding as the biggest state budget item. California will spend $32 billion–29 percent of its budget–on subsidized health care this year, a 129 percent growth in the past decade. Ohio’s $10 billion Medicaid program, left unchecked, will consume half of the state’s general fund spending by 2009. New York state’s $44 billion Medicaid budget not only constitutes 42 percent of state spending but also is now a larger budget item than education spending even for many of the state’s county governments, which are forced to share Medicaid’s costs (as is not the case in other states).

Health care advocates insist Medicaid spending is growing because of increasing need, but the numbers tell a different story. As tax revenues poured in during the 1990s, state politicians funneled the money into ever more generous programs. According to the Kaiser Family Foundation, two-thirds of Medicaid services states now provide are optional under federal guidelines–from free ambulette rides to doctors’ offices to dental and podiatry services.

From 1994 to 2000, when U.S. poverty rates were plunging, spending on Medicaid, originally a program for the poor, grew by 30 percent after accounting for inflation, an American Enterprise Institute study shows. By contrast, Medicare spending, entirely controlled by the federal government, grew only half as fast, and total U.S. health care spending increased by 18 percent after inflation.

Strange Alliances Arise

Government spending has bred strange alliances, as unions and management put aside their differences to lobby for more public money.

In Illinois, Maryland, and Ohio, for instance, the nation’s largest operator of private nursing homes, Trans Healthcare Inc., struck an agreement with Service Employees International Union (SEIU) locals not to oppose organizing efforts at its facilities if the union would help it lobby for higher Medicaid reimbursements. Together, the two groups created a lobbying arm financed with a $100,000 union contribution and a company pledge to match that amount.

In New York, an alliance of Local 1199/SEIU and the Greater New York Hospital Association has used its hefty financial resources and political clout to propel the state’s Medicaid budget, already the nation’s biggest, to stratospheric heights. In 1999, a joint union-hospital group spent $13 million–the largest sum ever for a state lobbying campaign–on a successful effort not only to derail Gov. George Pataki’s (R) Medicaid reform efforts, but also to press the state to pour billions from its share of the federal tobacco settlement into expanding the program.

Steven Malanga ([email protected]) is an award-winning financial reporter and author of The New New Left (Ivan R. Dee, 2005). This article, used by permission, is a condensed version of “The Conspiracy Against the Taxpayers: Why public servants live better than the public,” in the Autumn 2005 issue of City Journal, a quarterly publication of the Manhattan Institute, where Malanga is a contributing editor. The full article is available at