Budget Fight: What Public Employees Really Cost

On Sept. 6, 1791, a government worker named Robert Johnson rode his horse through a Pennsylvania forest. An unlucky man, Johnson. He was assigned to collect the first domestic tax ever imposed by the U.S. government — a whiskey tax designed to help pay down the nation’s mounting debt.

That night, 15 or 20 of Johnson’s fellow Americans came thrashing through the trees, stripped him naked, cut his hair and tarred and feathered him. It was the first raid in what would come to be known as the Whiskey Rebellion — an uprising that ended only when President George Washington sent 13,000 troops to restore order.

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Since the beginning, Americans have resented government workers’ asking for money. The distrust ebbs and flows, but the less financial security we have, the angrier we get. Since the 1970s, the only recession that has not been accompanied by a spike in distrust of the government was the one in which the 9/11 attacks occurred.

Right now, it may feel as if we are living through just another trust contraction. The air is charged with fiscal obscenities — some of which are true. State pension systems are underfunded by $1 trillion to $2 trillion, depending on who is doing the guessing. But this time is different. The American government worker is at a crossroads, and what happens next will determine the long-term competitiveness of the whole country. Both sides of the debate, the unions and the GOP governors, are furious. One side is filing lawsuits, comparing elected officials to Egyptian dictators and demanding promises be kept, markets be damned; the other is calling for an end to collective bargaining for workers, sweeping cuts and, most of all, revenge.

(See a TIME video of Americans discussing spending cuts.)

But the opportunity before us is not to shrink or grow government: it’s to make it smarter. Over the past three decades, nearly every other job in America has gone through the productivity wringer. Starting with manufacturers and moving through retail and professional services, we have had our jobs galvanized by technology, stripped bare by efficiency metrics and honed by competition. It has been a grueling journey, but it’s the primary reason America still has the largest, most prosperous economy in the world.

Now it’s the government’s turn. If we seize upon this crisis to make basic changes — to start rewarding public employees in part on the basis of how effective they are, for example — we could do more than just stabilize our budgets; we could raise our entire economy.

For now, the efficiency gap between the public and private sectors is holding us all back. The U.S. ranked 68th (out of 139 countries) in terms of wastefulness of government spending in the 2010-11 World Economic Forum report on global competitiveness. Experts put our public-sector productivity about 10 years behind that of the rest of our workforce. If public workers could halve that gap, the annual savings would ring in at $100 billion to $300 billion, according to a new study by the McKinsey Global Institute. That would mean the equivalent of a recurring stimulus package every three to eight years.

See an infographic about America’s budget-cut balancing act.

“The choice of cut more or tax more is not acceptable. You have to do it better,” says Lenny Mendonca, a McKinsey senior partner who has spent 20 years analyzing productivity. “Right now, the conversation is all about the near-term cuts. But over the long term, the only way out of this is massive productivity improvement.”

Cuts must be made, particularly to unsustainable pensions, but seeing them through the lens of productivity looks very different from slashing and burning through with the blinders of ideology on. Washington state senator Rodney Tom has introduced a bill to require school districts to make necessary teacher layoffs based on performance ratings, as opposed to by seniority alone. That’s reform based on results. Then there are Wisconsin Governor Scott Walker’s proposed pension and health care changes, which would exempt police officers, state troopers and firefighters — who have among the most expensive benefits. That’s change based on politics, which is how we ended up here to begin with.

(See pictures of the showdown in Wisconsin.)

We know we can do government better because it’s already happening. America is a carnival of high- and low-functioning bureaucracies. In North Carolina, the pension system is just fine, thank you. That’s because public officials and pension-fund managers there have consistently minimized risk, assumed a realistic rate of return on their investments and paid what was owed into the system. “It’s not magic,” says Elizabeth Kellar, head of the Center for State and Local Government Excellence. “It really is a matter of fiscal discipline over time.” By comparison, officials in New Jersey and Illinois have recklessly underfunded their pensions, in some cases granting retroactive benefit increases without paying for them.

People who study government performance can rattle off a list of the better-run states and cities in the country: Virginia, Washington and Utah; Phoenix, Austin and Portland, Ore. These places have almost nothing in common except that their leaders decided to make more policy choices based on data and measure their results — and they got rank-and-file workers to buy into their vision.

(See more about potential government layoffs.)

It’s risky to generalize about 21.6 million government workers (akin to generalizing about the 108 million people in the private sector, from IHOP to Apple). But let’s get a few things straight right from the beginning.

None of them are faceless bureaucrats. They are regular people but more educated and a bit older than the average American. In Ohio, 1 out of every 7 employed people works in government. In New Jersey, the number is closer to 1 in 6. That state’s governor, Chris Christie, is at war with the teachers’ unions, but his own late mother worked for a board-of-education office and was a mandatory union member for 25 years.

Many Americans think of Washington when they think of government workers. But the vast majority are state and local employees. The country has 2.2 million federal civilian workers — compared with 19.4 million at the state and local levels. While more than half of Americans think federal workers are overpaid, federal pensions and salaries are actually less generous on average than those of many state and local jobs.

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So what do these 19 million people do all day? Almost half work in education, which rivals health care for the most wasteful sector in America. The rest are mostly police officers, firefighters, social workers, nurses and prison guards. In other words, they have the jobs that have always been politically sacrosanct, which may explain why they are the last to join the 21st century.

Are they overpaid? Researchers have had many boring fights over this question, partly because it is impossible to answer with precision. (New Jersey, for example, has 600 school disctricts, each with its own rules. Pennsylvania has more than 3,000 pension plans.) But the studies comparing government and private-sector workers with similar levels of education, age and experience usually find that government workers earn less in salary.

(See “Beyond Unions: Five New Rules for Teachers.”)

But money isn’t everything. The biggest difference between public and private workers is how they get paid. Government workers get more of their total compensation in the form of benefits — especially health care and retirement funds. Some studies have tried to compare all-in compensation, which is really the only sensible thing to do. Those studies have generally still concluded that public workers make slightly less, all things considered.

Except that those studies are not truly considering all things. The data about health and pension benefits for government workers is badly flawed at the moment. It’s missing billions of dollars that have not been paid by many local and state governments to fulfill their legal obligations. So most studies cite figures for what governments and their workers are putting into the system — not what may actually be paid out in the future.

(See how to make great teachers.)

Now we’re getting to the heart of the matter. In many states, we simply don’t know how much public workers will make in total. We just know that the amount will swing between outrageous and reasonable depending on the job and town. In some California locales, under increases passed by elected officials during the Internet boom, public-safety workers can pull down truly swank livings, given their salaries, health benefits and guaranteed pension payouts. At least on paper, some firefighters are the dotcom millionaires you never heard about.

That said, the typical career public employee who put in at least 30 years of service in California and retired two years ago is collecting about $67,000 a year in pension payouts. That’s a healthy figure, but remember that about half of California’s public workers (like 25% of government workers nationwide) aren’t allowed to collect (or pay into) Social Security, due to an old legal fight about the federal government’s right to tax state workers. Recently, lawmakers lowered benefits for future state hires and raised contribution rates for some current and future workers. But as in other states, case law generally considers the benefits for current and past employees untouchable as a contractual matter, so changing those dotcom payouts will require a brutal fight.

See the protesters on the Wisconsin State Capitol’s floor.

But wait — even if we knew exactly how much all those benefits are worth, our equation would still be missing the value of one of the most important benefits of all, one that most of us lost years ago. Job security is the gold-plated benefit of the 21st century. How much is it worth? No one knows for sure, but in experiments people value certainty at very high levels. And though public workers have suffered job losses in the past year (and will suffer more this year), the government remains the most reliable employer in the country. Compared with before the recession, there are only 1% fewer employees at the state and local levels, according to the U.S. Bureau of Labor Statistics. The federal civilian workforce is actually 12% larger than it was in November 2007. Meanwhile, the number of private-sector employees has declined 6.5%.

If we really want more effective governance, we should tie these generous benefits to meaningful outcomes. In Singapore, Cabinet ministers and top civil servants have had their pay increased to compete with private-sector earnings since the 1970s. That means the government attracts the best and brightest candidates, and they are harder to corrupt. But when the rest of the country loses money, so do they. In 2008, Singapore’s Prime Minister and senior civil servants took 15%-to-20% pay cuts to reflect recessionary losses (which brought the Prime Minister’s pay to a measly $2 million). Last year, when Singapore’s economy grew by 15%, civil servants received bonuses worth more than two months of salary.

(See 10 big recession surprises.)

As anyone who works in the private sector knows, there is no perfect way of measuring performance. But that’s not an excuse to do nothing. The best organizations use a mix of subjective and objective data tied to the actual job mission and then either repurpose or remove those who rank in the bottom tier — and give more money and responsibility to the top tier.

The government can pull this off. The U.S. Foreign Service, for example, maintains a competitive up-or-out policy. Every rank essentially has an expiration date. Anyone who is not promoted within that set amount of time must leave the Foreign Service altogether. But in most of America, taxpayers have little reason to trust that public-sector workers have been hired, promoted, paid or laid off according to how well they have served the public’s interests; if they had, then sizable pensions would be easier for the rest of us to swallow.

This anachronism is unsustainable, and the most forward-looking labor leaders will tell you so. Andy Stern is the former president of the 2.2 million — member Service Employees International Union. “The only job security for public workers in the long run is quality and efficiency,” he says. “People want efficient services … There has to be a massive push, and I would hope unions will try to lead it, toward quality and productivity.”

(See 10 ways your job will change.)

Lately, politicians in Wisconsin, New Jersey and Indiana have blamed unions for their states’ fiscal crises. But the truth is, the unions could do nothing without the agreement of legislators, mayors, city councils and school boards. Eliminating collective-bargaining rights will not fix the main problem, which is a lack of healthy incentives. But we know by now that incentives can change, even in government.

Following the last recession, Georgia’s then governor, Sonny Perdue, vowed to revolutionize government performance. Sound familiar? That’s because leaders in 24 other states did the same thing over the past decade. Most of them failed. But five states actually delivered on their promises in a serious way.

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Georgia was one of those places. Perdue plastered all over the state the motto “Faster. Friendlier. Easier.” His task force produced 130 recommendations to make government smarter. Of those, 127 have now gone into effect. Motor-vehicle titles now take five days (not six weeks) to process. Parents can sign their kids up for Medicaid in 15 days, down from 113 days. The state’s 32 call centers report monthly performance data, including average hold times (three minutes as of 2010).

In 2008 the Pew Center on the States ranked Georgia among the best-managed states in the country. In 2010, Perdue was named one of Governing magazine’s public officials of the year. Around the same time, all three rating agencies rewarded Georgia the highest bond rating, a triple A.

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Perdue, who was term-limited out of office in January, understood this mission as an existential one: “On the campaign trail, Georgians told me that they felt like government wasn’t working for them, and I promised to change that … Government is like a co-op. We are all owners and users, and we are all better off when it works.” At least four other states — Virginia, Minnesota, Texas and Kentucky — made their bureaucracies smarter over the past decade, implementing more than half the performance-boosting recommendations made by their commissions. What happened in the other states? Not much. They failed to turn proposals into reality — sometimes because no single senior-level person was accountable for seeing the effort through and sometimes because the task forces did not work with the legislature to get it done. “You need a group focused on delivery. It sounds so generic, but it’s not there now,” says Mendonca, the McKinsey productivity expert. “The problem is not ideas. The problem is making it happen.”

Colorado is trying. Last year, teachers’ unions, state employees’ unions, retirees, state patrol officers and legislators from both sides of the aisle agreed to pension reforms — including caps on annual cost-of-living adjustments for current and future retirees. The state also passed a groundbreaking law tying teachers’ job security to measures of students’ progress, including test scores.

When Brandon Shaffer, the Democratic president of the Colorado state senate, talks about these victories, he speaks as though he’s discussing a painful personal matter. “Nobody enjoyed voting for pension reform,” he says. His mother is a retired teacher, and his wife currently teaches fifth grade. “We knew it was urgent, and it would just get worse if we procrastinated.”

(See what you can do to help the education system.)

Colorado still has plenty of problems. A lawsuit has been filed to overturn the pension reforms. And if the economy falters again, more changes may be needed to keep the fund solvent. But Shaffer says he has been surprised by taxpayers’ reactions so far. “People come up and thank me for stabilizing the [pension] system. Usually those are people in the system themselves.”

Shaffer says politicians from other states have contacted him to hear how Colorado did it. He tells them that what mattered the most was that he and the former Republican minority leader trusted each other. “We linked arms and said, ‘We’re doing this together, no matter what.’ The outside forces couldn’t control the process.” He also reminds them that voters actually crave a more meritocratic government. “People aren’t against making a tough decision in hard times,” he says. “But they want to know that it’s a rational decision.”

— With reporting by Katy Steinmetz / Washington

Ripley is a Bernard L. Schwartz fellow at the New America Foundation.

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