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Tax VOX

Is public employee compensation really causing Wisconsin's budget woes?

Either way, discussions about public employee compensation do need to be part of long-term budget fixes.

By Kim RuebenGuest blogger / February 28, 2011

Teacher Kristen Henningfeld, center, of Elk Mound, Wis., protests on the steps of the state Capitol in Madison, Wis., Saturday, Feb. 26, 2011. Wisconsin's budget shortfalls are due to low tax revenues, writes guest blogger Kim Rueben.

Andy Manis / AP

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Wisconsin’s ongoing battle over the future of public sector unions has put the question in stark relief: Is public employee compensation causing the states’ current budget shortfalls and must it play a role in future fiscal decisions?

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The answer to the first question is, “no.” The projected budget short-term deficits in Wisconsin and 45 other states is largely a function of tax revenues that remain below their pre-recession peak levels, despite an improving economy. In Wisconsin, Governor Scott Walker’s decision to pass tax cuts that benefit small business and encourage health savings accounts will deepen future revenue shortfalls

However, public employee worker discussions do need to be part of any long-term budget fix.

To start, it will be years before states return to a level of tax revenues they enjoyed in the days of the Internet and housing bubbles. And wage and benefit costs are a large part of state budgets.

In 2007-2008 (the most current year data is available) wages and salaries–excluding pension contributions and other benefits– made up 38 percent of state and local current spending. For local governments, wages and salaries represent 46 percent of current spending. For states, salaries and wages account for 26 percent. What else do states spend money on? Payments for social services/public welfare represent 41 percent of state spending (which does include some salaries and wages) but within this category payments to vendors (largely Medicaid payments to hospitals, nursing homes, and the like) make up 34percent.

As a result, it is hard to imagine how states can balance their budgets without cuts in public sector total compensation either through wage cuts, benefit concessions, or furloughs and layoffs. That will need to be one piece of the solution, along with finding ways to reduce the growth in health care spending and tax increases. With 2012 deficits for all states projected at $124.7 billion and Wisconsin projecting a two year deficit of $3.6 billion, governors will have to rely on some of each.

Of course, many states are already debating these options. Last year 20 states changed pension rules, and 10 raised employee contribution levels. However, Wisconsin’s Governor Walker would go far beyond labor concessions on benefits (which the Wisconsin public sector workers have already said they would accept). The Battle of Madison is really about his attempt to limit the collective bargaining rights of most public employees. Wisconsin was one of the first states to grant public sector worker rights and has some of the strongest with an implicit duty to bargain.

Sadly, the long-term cost of Walker’s plan may be that it poisons discussions about other needed public sector reforms. Before the current standoff, the Wisconsin Education Association Council, the state’s largest teachers union, published a reform plan that endorsed a statewide teacher evaluation system and performance pay for teachers. Today, any conversation about education reform and what works best for students suddenly seems very far away.