MOORLACH UPDATE — Total Compensation Negotiations — March 20, 2019

Informing the residents of California about the per capita unrestricted net position of cities, school districts, community college districts, counties and states is something I’ve done to bring some sense of fiscal reality to their consciousness. For many municipalities, the finances are not pretty. And, personnel costs, from a "total compensation" perspective, need to be carefully reviewed.

Fox & Hounds provides an editorial submittal, in the piece below, that touches on this concern and provides a couple of Sacramento bargaining-unit milestones to be watching in the months ahead.

Seven Year Look Back

For the joys that our new Governor will be facing on the negotiating front, see the fun I had as Chairman of the Board of Supervisors back in 2012 at MOORLACH UPDATE — Total Compensation Fireworks — July 7, 2012.

How Much Should We Pay Our Public Sector Workers?

David Kersten

By David KerstenDavid Kersten is an independent political consultant who lives in the Bay Area. Kersten is also an adjunct professor of public budgeting at the University of San Francisco.

http://www.foxandhoundsdaily.com/2019/03/how-much-should-we-pay-our-public-sector-workers/

Public employee compensation issues are never far from the headlines in California, but both 2019 and 2020 appear likely to continue the recent trend of increasingly contentious negotiations and the accompanying highly charged public debate.

At the local level, in recent months we have already seen teacher strike authorization votes in the major urban school districts of Oakland, Los Angeles, and Sacramento, among other localities.

At the state level, the election of Gov. Gavin Newsom raises the question of whether the Governor’s Office will continue former Gov. Brown’s precedent of requiring state level bargaining units to accept new paycheck deductions to help pay for the cost of retiree medical care.

Newsom has already signaled that he will uphold the “California rule,” which prohibits any reduction of existing public employees’ pensions even if it causes the insolvency, and or ultimate bankruptcy of the public agency in question.

Five bargaining units representing about 46,000 state workers have contacts expiring in July 2019, and the contract for SEIU Local 1000, the state’s largest union representing about 95,000 employees, expires in January 2020, according to a Sacramento Bee report.

What is not often discussed during this periodic collective bargaining process at both the local and state levels of government in California is whether the state’s system for setting public employee compensation is working or not, and perhaps more importantly, whether this whole system is sustainable given the state’s rapidly escalating public debt levels?

The unfortunate reality is that the state’s whole collective bargaining system, and accompanying laws, was setup decades ago, dating back to Gov. Brown’s first stint as Governor, and has changed little since then.

As recent events have begun to suggest more clearly, this system appears increasingly disconnected from several key principles of good government and effective public sector financial management.

Perhaps most importantly, the compensation of our public sector workers should be linked to what is financially affordable and sustainable for a given public agency.

As reported by Senator John Moorlach, the California Policy Center and others, the mounting debt and looming financial insolvency for the vast majority of public agencies in California suggests that many public agencies in California are struggling to pay their contractual debt obligations, of which the vast majority is related to public employee compensation.

Furthermore, the recent strike-ending deals cut in Oakland and Los Angeles only served to exacerbate the financial weaknesses of the school districts and push existing problems further into the future, particularly with regard to public employee compensation practices.

Another key issue that is almost completely forgotten from the get-go, is how much should we pay public sector employees to begin with?

In the private sector, employee compensation is determined by competition and market forces. But in the public sector most positions are compensated based on decades of previous negotiations which yields a pay scale, and total compensation package, that is often far in excess of what would be paid for comparable positions in the private sector.

The public sector unions have perfected their rebuttals to these issues, and I have heard an analyzed all of them, but the simple fact remains: why should California taxpayers compensate public sector workers in excess of the market rate for a given position?

The reality is that it is common for public employees to be compensated far in excess of what they would receive in the private sector for comparable work. The California Policy Center and others have found this excess compensation to be as high as 100% or more when total compensation is included, particularly benefits.

Nobody disputes the value that our public sector workers provide, but when 20% of the state lives in poverty and many more Californians are living paycheck to paycheck, this is really an issue of fundamental fairness and equity to the average California taxpayer.

One last principle that is rarely discussed in the public sector is the concept of linking compensation to performance.

In the private sector, this principle is of the utmost consideration because every employee has to be paid based on the value that they provide to the company. Moreover, the linking of pay to performance often provides a great way to incentivize employees to do a better job, thus benefiting both the employee and the company.

In California public sector collective bargaining, public sector employees are routinely awarded a whole host of bonuses, premiums, retroactive pay increases, and raises without any connection to their actual performance or value provided to the government or people of California.

In addition, as most public managers would tell you, it is almost impossible to fire underperforming or poorly performing employees, and they commonly get moved around without the bureaucracy rather than fired just because it is so difficult, almost unheard of.

From a public management perspective, the impact that this disconnect between compensation and performance permeates the whole system of California government—providing significant disincentives to work hard, produce results, and serve the state and its people in the most beneficial manner possible.

As a former financial analyst for public sector collective bargaining, I am not holding my breath for any of these practices to change soon, but at the same time, I acknowledge that change could be on the horizon at some point.

The reality is that public agencies, while more insulated from market factors, must still operate in the same market economy and within some of the same fiduciary, legal and financial parameters that private businesses do.

If a private company, makes poor financial decisions it goes out of business or is reformed and restored to financial viability.

The public sector, on the other hand, does not have the same financial bottom line as private sector businesses and can continue to deteriorate, both financially and in terms of compromised performance, over a significantly longer time horizon.

Public sector agencies, particularly local government agencies, can run out of money and go bankrupt—ultimately leaving many debts unpaid, particularly public employee debt obligations.

Just take a look at Orange County in the 1990s, and the California cities of Vallejo, Stockton, and San Bernardino in the 2000s.

No U.S. state has went bankrupt yet, but some analysts believe the State of Illinois could be close, and there is also the case of the U.S. territory Puerto Rico’s debt crisis.

As the recent unrest in the state’s education system suggests, the road to financial ruin takes time, and is not pretty.

In the end, the people who are the most hurt are the least vulnerable, our teachers and kids in this case–it is just a shame that more of our elected officials and union leaders do not realize this and heed this fact of life before it is too late.

image18.png?w=660&h=165

This e-mail has been sent by California State Senator John M. W. Moorlach, 37th District. If you no longer wish to subscribe, just let me know by responding with a request to do so.

Also follow me on Facebook & Twitter @SenatorMoorlach