The Wisconsin Senate on Wednesday took decisive and controversial action in its weeks-long battle with Democrats and the labor unions for which they have been fighting. In an 18-to-1 vote, Senate Republicans moved to strip many state workers of their collective-bargaining rights.
Senate Democrats had fled the state in mid-February to deny Republicans a quorum and prevent this vote. But Senate Republicans decided yesterday that they could detach the collective-bargaining provision from the broader "budget repair bill" and vote on it without a quorum. A quorum would have been needed on any bill that affects spending.
A Democratic member of the Assembly present in the Capitol, Rep. Peter Barca, said that the Republicans' procedural maneuvers violated Senate rules. The Assembly is expected to vote on the bill Thursday.
The Republican insistence on stripping collective bargaining from many key state unions has invoked the wrath of labor unions and their supporters nationwide – even President Obama. They call it a needless and politically motivated ploy to bust the power of public-sector employee unions.
According to Gov. Scott Walker (R), though, it is something else entirely. It is a foundation for the substance of his budget-cutting plans: containing labor costs including public-employee pensions and health-care expenses. Media reports suggest that unions have agreed to some concessions to help close the state's budget gap, but Governor Walker has insisted that collective bargaining could easily undo those core reforms in years ahead.
Are pensions really budget busters?
Many economists say the needed fixes can be made without new constraints on collective bargaining. But other budget experts argue that union bargaining power is a central part of the problem – and Wisconsin isn't the only state where new constraints on bargaining are up for debate.
But beyond that, are the pension and health costs of union employees really a budget buster for states?
Yes and no. For the most part, states aren't facing an immediate fiscal crisis due to public-employee benefits – and Wisconsin certainly isn't. But states do face a rising tab, and many are far from on track to meet those promises.
As a result, the question of paring back compensation for union employees has come up in numerous other states from New Mexico to Ohio, and even in Wisconsin – one of the better-prepared states – the issue is a genuine one for statehouse debate.
Federal Reserve Chairman Ben Bernanke, for one, said recently that states could be on the hook for as much as $3 trillion in unfunded pension commitments and $600 billion in retiree health benefits.
The short-term view
Yet when economists speak in such terms, they are describing a long-term problem as opposed to a short-term crisis.
The current budget trouble in statehouses has more to do with the aftermath of the deep recession that ended in 2009 than with pensions. The steep declines in tax revenues that accompanied the recession meant that, collectively, all 50 states faced a shortfall of 18 percent of their 2011 budgets, according to a recent report by the liberal Center on Budget and Policy Priorities (CBPP). Wisconsin's shortfall for 2012 is 13 percent of its 2011 budget.
Those shortfalls have led to significant budget cuts. While tax revenues have begun to climb upward again, states are still scrambling to close gaps between revenues and planned spending in the next fiscal year.
By contrast, pensions are a relatively minor concern for near-term budgeteers. As of 2008, state and local governments devoted an average of only 3.8 percent of their operating budgets to pension funding, according to the CBPP report.
"In most states," the report concludes, "a modest increase in funding and/or sensible changes to pension eligibility and benefits should be sufficient to remedy underfunding."
The long-term view
Without action, however, employee-benefit costs would be a significant part of the long-term financial challenge facing states. The problem is not confined to unionized employees, who make up about 4 in 10 state and local government employees. But it's important for unionized employees to share in the belt-tightening, say proponents of cutbacks.
Since laws generally guarantee pension benefits that have already been accrued, "state and local governments may face very significant financing problems in years ahead," says Andrew Biggs, a scholar at the conservative American Enterprise Institute, in a recent analysis for the group Free Enterprise Nation.
Some states have other long-term problems, such as falling short on Medicaid funding or relying or issuing debt to fund operations. And some states including California and Illinois need to make sharp course corrections. But taken as a whole, the state finance challenges are not yet cataclysmic, some experts say.
Amid the challenges, some credit analysts have raised the prospect that some states could default on debt. But most state-finance experts say that's unlikely, and that there's no need for legislation (proposed by some) to allow states to shed debt by entering bankruptcy.
For their part, state officials say the talk of bankruptcy legislation is harming their reputation with investors, by raising groundless fears about the quality of state bonds.