TCS Daily

Happier Public Union News from New Jersey

By Josh Barro - August 18, 2010 2:53 PM

Here's a change of pace from the usual doom-and-gloom news on municipal-worker relations: a number of towns in New Jersey have been reaching agreements with their local police unions that cut costs while avoiding layoffs. Last week, the Newark Star-Ledger reported on at least six towns where unions agreed to give-backs in exchange for a no-layoff promise. This is a good trend, but state lawmakers -- and those elsewhere in the country -- can do more to expand it.

Layoffs are usually the worst way for governments to save money on personnel costs. They disrupt the provision of government services and increase unemployment -- leading to the concerning message from July's jobs report, where private hiring was offset by state and local government payroll contractions.

Other cost-saving avenues (like furlough days, pay freezes, and reductions of benefits) are usually preferable to layoffs. Yet municipalities use layoffs in part because collectively-bargained contracts leave them few options for cost savings. Often, the only way to achieve other kinds of savings is through the threat of layoffs -- but that only works because sometimes the threat gets carried out. Giving municipal employers more options would both reduce employee compensation costs and reduce the appeal of layoffs.

In New Jersey, it's interesting to see where unions and municipalities are managing to reach no-layoff deals and where they aren't. The six towns cited by the Star-Ledger (Princeton, Manalapan, Howell, Montville, South Brunswick and Egg Harbor Township) are mostly affluent, except Egg Harbor which is middle-income. None are impoverished.

Meanwhile, Newark (median family income: $31,000) has been unable to reach a no-layoff deal with its police force. Instead, the city will lay off 167 officers and demote 112 more, out of a force of 1,062. The article portrays the lack of a deal as a matter of size -- the savings Newark wants are too large to be effectively achieved without layoffs.

But this isn't convincing; sharp pay and benefit cuts could produce the same savings as layoffs. Because the proposed layoff and demotion plan is large relative to the force size, the union should be more willing than usual to deal. The key difference is more likely one of fiscal capacity: Newark isn't able to give up enough of its proposed savings to entice the union into offering give-backs.

Manalapan, where the median family income is $114,000 per year, agreed not to lay off 11 police officers in exchange for overtime changes that will save $300,000 annually. But 11 layoffs would have saved more than $1 million per year; the town will come up with other funds to close the rest of that gap, presumably by raising property taxes.

Newark does not have that kind of running room. The city already faces a high property tax burden and has many vacant properties. We don't ordinarily think about applying the Laffer Curve to property taxes, but Newark has to seriously worry that a significant property tax increase will drive up tax defaults and therefore raise little revenue.

And because incomes in Newark are low, such a tax increase would be a significant hardship even for homeowners not in danger of default. Basically, Newark needs every dollar of its proposed savings. Because unions tend to be dominated by long-serving officers who will be protected in a layoff plan, the union has little reason to cut a no-layoff deal on those terms.

If there is a silver lining here, it's that Newark enters the layoffs as one of the most heavily-policed large cities in America. The city employs 3.8 police officers per 1,000 population, compared to an average of 2.5 for cities with more than a quarter million residents. But given Newark's high violent crime rate, it's hard to shrug at a 16% reduction in the police force.

Newark's decision is a sad upshot of the mechanics of union negotiations: the broadest menu of cost-saving options is generally available to those municipalities with the least-severe fiscal problems. A pro-management reform of labor rules would be good for all municipalities, but it would bring the greatest benefits to low-income jurisdictions like Newark that have the least flexibility in their budgets.

What would such a reform entail? A key component has been proposed by Governor Chris Christie and will be discussed by the New Jersey legislature in special session this summer. Christie would allow cities and towns to opt out of civil service rules that make it more difficult to fire or reassign employees. Instead of focusing the brunt of layoffs on the most junior (and least expensive) employees, cities would have a freer hand to remake their staffs. That would mean fewer total layoffs would be needed to save a certain number of dollars.

The state should also make reforms that help cities manage benefit costs. While Christie and legislative Democrats agreed on several positive pension and health benefit reforms this winter, which will save New Jersey municipalities several hundred million dollars per year, more can be done.

On the health benefit side, the state's new property tax cap includes an exception for growth in health benefit costs. Unfortunately, this will create pressure for towns to give out ever more generous health benefits, instead of higher wages that might conflict with the cap. (And they're starting from a high base: Newark, for example, spends about $17,000 per employee on health benefits, about double what is normal in the private sector in New Jersey.)

The cap exclusion was designed to recognize that health care cost inflation is out of towns' hands. But while it would be unreasonable to expect health benefit costs to grow at just 2% per year, that doesn't mean we need to throw up our hands and say they are uncontrollable. Instead, the legislature should help cities and towns deal with the rising cost of health benefits by excluding them from collective bargaining.

Even better would be to fix the value of public employee health benefits at a ratio to the average private benefit value -- say 125% -- which could then be actuarially adjusted to account for demographic differences in the public workforce. This would save municipalities thousands of dollars per employee per year. It would also do a bit to bend the cost curve downward for all health care provided in New Jersey, by taking public employees off "Cadillac" plans that encourage overconsumption of care.

On the pension side, the state should phase out its chronically-underfunded defined benefit pension plans, moving new and unvested employees into 401(k)-style plans. This won't fix the tens of billions of dollars in unfunded pension liabilities, but it will cut municipalities' pension contribution costs going forward and prevent the formation of new funding gaps.

The recession's impact on state finances means that local governments in New Jersey, and around the country, will have to make tough choices to balance their budgets. But reforms that give local elected officials better options can reduce the disruption and pain that those choices cause -- and help push the unemployment rate lower.

This article first appeared on RealClearMarkets.

Josh Barro is the Walter B. Wriston Fellow at the Manhattan Institute


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