Pension reform needs to begin in the public sector. it is clear that a wide gulf between funding and compensation exists. When pointing out the fact that the majority of federal and state public employees are overcompensated, the response is typically that “these amounts were promised”. But with most budgets now currently running severely in the red, addressing the compensation question is the key to solving major deficit dilemmas across the country. We need to analyze how we got here from two perspectives: 1) what was promised and 2) who promised it.
For localities that want to achieve solvency, it is essential to find out foremost exactly what was really and contractually promised to the public workers and for how long. An executive or union member works under a contract that exists for a specific time period. Their obligation is to provide their services in return for certain compensation and benefits during that time. But that’s it — they are only covered for the period of the current contract.
This point is important because there really can be no part of a negotiated contract that promises any compensation or benefits for services rendered after the end of the contract period; otherwise, the locality runs the risk of runaway financial obligations for which it cannot properly budget and it was not binding future governments not yet in office.
Therefore, if accruals to a defined benefit retirement program to a public service employee have been contracted for, the benefit accruals earned by that employee during the period of the contract can’t be taken away. However, unless a new contract specifically continues that same program into that next contract, the employee should not be entitled to any additional accruals.
Unfortunately, it is apparent that this simple concept has typically not been followed during the vast majority of contract negotiations in the public sector. If it had, negotiators for management would have long discontinued offering the out-of-control defined benefit plan.
Such dereliction is part of the reason that it’s necessary to examine the second point – “who promised it”. It is evident that serious research needs to be done in localities into who it was that negotiated such overgenerous contracts. Ultimately, negotiators have a fiduciary responsibility to the taxpayer not to pay more than fair compensation, thereby restricting compensation and benefits to amounts no greater than what those skills would command in the private sector. Valuable (and expensive) benefits such as job security must be factored in as an element of compensation paid to public sector employees.
Contrast how negotiations are performed in the private sector. The profit motive there keeps compensation at levels where economic forces show to be appropriate (i.e., the point where people generate results that justify its cost). This reflects economically rational “fair” compensation levels. But because the public sector does not have these economic forces to keep compensation levels in check, it is incumbent upon the public negotiators to do so properly. Failing to properly negotiate has created the soaring budget deficits we are experiencing.
There truly is a fundamental difference between private sector “management” and those doing the negotiating in the public sectors. In the private sector, the negotiator — either personally or the company who pays their merit based salary — will suffer serious financial damage if they offer their work force too much, because they will be unable to compete with their competitors in the marketplace.
On the other hand, there are no such competitive inhibitions in the public sector and therefore the negotiation routine lacks the incentive for restraint. Even worse, in most cases, the self-interest of the public sector negotiator is more directly aligned with the union that can get him elected rather than the taxpayer whom he is representing. This is a true case of the fox in charge of the hen house.
Examining the contract process in the public sector will provide an opportunity for fiscal reform. This will ensure that no public sector worker be paid more in any new contract then what those services warrant, without regard to what the prior contract provided. Most importantly, once a contract ends there is nothing on the table. There is nothing to prevent any new contract from offering less that the prior contract, especially where pay and benefits of the prior contract were out of line.
Even though it may be politically difficult and unpalatable, anybody representing the taxpayers has an obligation to those taxpayers. Those who breached the public trust with mismanagement should be held accountable. Budget reform and deficit reduction will naturally follow once compensation levels have been stabilized and brought in line with their private counterparts.