Don’t raise taxes, cut employee compensation

San Diego Union Tribune, 7/3/10.

By David Crane

Recently a public employee union, SEIU, funded a study concluding that the state should raise taxes rather than cut expenditures in order to balance the budget. It’s understandable that SEIU would promote such a path since, as former California Speaker of the Assembly Willie Brown has pointed out, roughly 80 percent of every government dollar goes out in public employee compensation and benefits.

It goes without saying that most Californians would prefer not to cut beneficial government expenditures in order to close the deficit. But it would be worse to raise taxes, because tax increases reduce employment, wages and benefits in the private sector. With non-governmental employees already drowning in job losses, wage cuts, benefit reductions and retirement account losses, it makes as much sense to raise state taxes during an economic downturn as to drill holes in a boat during a flood.

Fortunately, there is another way to restore some funding: a temporary reduction in government employee compensation. This year, the state will directly spend $32 billion on employee compensation and benefits, up 65 percent over the past 10 years. Compare that to state spending on higher education (down 5 percent), health and human services (up just 5 percent and parks and recreation (flat), all crowded out in large part by fast-rising employment costs. Most of that increase arises from pay raises and benefit costs that together rose at roughly twice the rate of inflation over that period. Had those costs risen at the rate of inflation, the state would have saved nearly $8 billion over that period.

Moreover, that $32 billion accounts for only direct state expenditures on employee compensation and benefits. Not included in that number is indirect spending on compensation costs arising from state-funded programs not directly run by the state. For example, the state spends $1.5 billion per year for In-Home Supportive Services, which doesn’t show up as a direct compensation expense. An analysis of IHSS’s budget reveals that the average pay per hour for the program’s employees has increased by almost 70 percent over the last 10 years, nearly three times the rate of inflation. Program costs for IHSS increased by 281 percent, while the number of monthly cases increased only 106 percent.

Traditionally, public workers accepted a lower salary than their private sector counterparts in exchange for job security and better benefits, such as retirement pensions and health care. But not only have public employees maintained their high levels of benefits and avoided the job losses plaguing the private sector, their salaries have outpaced those of their private sector counterparts. The U.S. Department of Labor’s December 2009 Employer Costs for Employee Compensation report shows that state and local government employees earned $39.60 an hour, compared to $27.42 an hour for private industry workers. It’s hard enough to understand why government should pay its workers almost 50 percent more than the private sector. It’s even harder to understand why Californians should see their wages and benefits reduced further in order to sustain or grow that gap.

Millions of Californians are struggling to make do with less during the worst economic crisis in decades and the state is struggling through a fragile economic recovery already handicapped by last year’s temporary tax increase. They are loath to boost taxes when they know that 80 percent of every dollar goes to fast-growing employee compensation and benefits rather than programs actually benefiting citizens. A temporary cut in public-employee compensation could help provide funds for important programs and still leave public employees with better wages than the private sector, not to mention lifetime retirement benefits. Assured of such security, a short-term sacrifice by public employees would be welcome.

Crane is special adviser to Gov. Arnold Schwarzenegger for jobs and economic growth.

Californians are struggling during the worst economic crisis in decades and the state is struggling through a fragile economic recovery.

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