A municipal crisis

Kevin Drum posts this chart in response to the many recent assertions that public sector wages are outpacing the private sector:

He writes:

Obviously it's hard to know for sure if all the controls are properly accounted for, and you can decide for yourself if it's fair for high school and community college grads to make more working on the taxpayer dime than they would in private industry. Overall, though, this is yet another study that tells us the numbers are pretty close no matter how you slice them. It's always easy to find a few horror stories (usually cops or firefighters who works fantastic amounts of overtime), but in the aggregate it doesn't look like there's much evidence that government jobs are overpaid compared to private jobs.

Daniel Foster has a very good piece in National Review on this subject, detailing the tension between cash-strapped local and state governments, and the public sector and especially public safety unions who are – understandably – trying to protect their interests, avoid layoffs, and so forth. What this often amounts to is a protection of the interests of senior union members and the status-quo against new hires, and the interests of the unions themselves over that of the taxpayers who are, for the most part, also facing tough choices, layoffs, and wage freezes.

One quibble I have with Foster’s piece is his example of Fairfax, VA as a model of ‘good governance’ – especially when it comes to the public safety sector. This article by Radley Balko in Reason should dispel any notions that Fairfax is a model to which any police force should aspire:


Last November a police officer shot and killed David Masters, an unarmed motorist, as he sat in the driver’s seat of his car on the side of Richmond Highway, a major thoroughfare in Fairfax County, Virginia. Masters was wanted for allegedly stealing flowers from a planter. He had been given a ticket the day before for running a red light and then evading the police, though in a slow and not particularly dangerous manner.


In January of this year, Fairfax County Commonwealth Attorney Raymond Morrogh announced through a press release that he would not be filing any charges against the officer who shot Masters. The shooting, Morrogh found, was justified due to a “furtive gesture” that suggested Masters had a weapon. The only eyewitness to this gesture was the police officer who pulled the trigger.

There exists dash-camera video of Masters’ shooting. There are also police interviews of other witnesses, and there is the police report itself. But the public and the press are unlikely to see those, or even to learn the officer’s name. That’s because the Fairfax County Police Department—along with the neighboring municipal police departments of Arlington and Alexandria—is among the most secretive, least transparent law enforcement agencies in the country.

The whole thing is worth a read. And while transparency and secrecy may not play directly into the pension question, this accounting should at least show that there’s more to an effective police force than its pension and benefits arrangements and the strength of its union.

In any case, I think both Foster and Drum are missing one crucial factor in the current crisis facing local and state budgets, and what that questions says about public pensions and public sector unions and compensation more broadly: namely, why are we in this crisis to begin with?

During the housing boom, property values across the country sky-rocketed. Local coffers were filled to the brim. Spending increased at a pace with these new surpluses. Everyone thought, however irrationally, that the good times were here to stay. The private sector was just as guilty as the public sector in its exuberance.

But the good times did end, and as property values plummeted, so did revenues. It’s important to note that tax rates didn’t fall, but tax receipts did. The problem was not merely one of mismanagement, but rather one tied directly to the recession and previous mismanagement of surpluses.

As property values increased, so did property tax revenues. As property tax revenues increased, so did spending by local governments. All of this was exacerbated by increased consumer spending and the correlated increase in sales tax revenue. Now that property values are falling, revenues are falling. Consumers are spending less, so sales tax revenue is falling as well.

Either taxes have to go up beyond their pre-boom levels, or spending cuts need to be made. I say pre-boom level because to account for the increased spending during the boom years, we’ll need revenues quite a bit higher than the pre-boom years.

There is certainly a strong case for both tax increases and spending cuts, but it’s hard to make the case that the full brunt of the poor decisions made by local governments during the housing boom should be born by taxpayers, many of whom didn’t buy a house during the boom. For homeowners who have lost 40% of its value, you can’t simply expect the homeowner to make up the lost revenue through higher taxes. Homeowners are already struggling and underwater with mortgages that far outstrip the value of their homes.

Of course, spending cuts during a recession are very difficult. That’s why in good times – during times when property values are increasing, and revenue is steady – we should look to save more and spend less. Austerity and thriftiness should be practiced when the economy is chugging along, not when the economy is in shambles. Unfortunately, this is the least likely time for government restraint.

So we are left with this paradox and no easy way out of it.

The moral hazard of public sector unions with too much political sway becomes glaringly obvious during these times. It’s not that public sector workers make too much money – Foster’s piece claims they make more than private sector equivalents, but the above chart shows that this really depends on quite a lot. And certainly police officers and firemen make a great deal working overtime in dangerous, stressful occupations. These people should be well paid, as should teachers and many other public sector workers.

No, the problem is twofold: the first is that unions are inflexible even in times of crisis; the second is the very real conflict of interests present between elected officials backed by public employees – such officials may ignore the fact that they are also beholden to non-public-sector citizens.

It’s much more difficult for local governments to make the necessary hard choices when unions hold so much political sway. This is, of course, the point of being in a union in the first place – to be able to collectively bargain and not get screwed over by penny pinching officials. But compromise and sacrifice are needed all around during a recession in order for governments to get back on their feet and the private sector to fully recover, and union intransigence is part of the problem.

Similarly, public sector pensions are based on unrealistic economic projections, and like the unions they are inflexible. Pensions are promised, guaranteed payments that states and local governments are required by law to pay. And they should be required to pay out, even if they were promised by past politicians seeking the support of the unions – and even if they were little better than bribes.

But it’s also high time that the pension system was drastically reformed to be more responsive to the realities of the market and to be made more sustainable so that future generations aren’t left on the hook for unreasonable tabs. There are countless ways we can do this, and an honest debate needs to be had on the subject on both the left and the right – but it has to happen.

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