Oregonian 10/24/2010
Imagine for a moment the owners of a business sitting down to hash out an emergency bailout for their firm.
Income has plummeted, and lines of credit are tapped out. Customers clamor for more services, but the cost of employees' health and retirement benefits is growing faster than the company can raise prices.
What do they do?
Many employers already have made those tough calls. But the grim scenario still awaits Oregon's next governor and the 2011 Legislature. Tax revenues are down, demand for services is up and total compensation for the average state employee is slated to grow by 15 percent over the next two years.
Raising taxes isn't on the table. Services already have been cut, and further reductions to schools, prisons and the poor will spark great debates and surgical strikes.
What hasn't been permanently cut is state employee compensation. Yes, workers sustained pay freezes and furlough days that amounted to pay cuts. All were effectively temporary measures.
As the Nov. 2 election nears, public employee pay is the elephant in the room.
Discussing the subject in detail is tough for Democrats, who derive much of their financial support from public employee unions. And while Republicans have been more forthcoming on the subject, it's not clear yet how much influence they'll wield in the process.
While a projected "decade of deficits" seems to call for fundamental changes, that prospect raises basic questions about what's fair for public employees, whether the state can continue to attract and retain good employees, and what services state government needs to provide to residents.
Gov. Ted Kulongoski's so-called Reset Cabinet report recommended limiting the increase in state employee compensation to the same level as the private sector -- about 6.5 percent over the two-year budget cycle. But that would leave the state far short of its ultimate cost cutting goal.
Compounding the problem: The state has no seat at the table when schools bargain with teacher unions, meaning its own negotiations will cover only one-third of the general fund dollars that go toward labor costs.
At a minimum, observers say budget realities should force a change in the way labor negotiators and lawmakers approach collective bargaining, which begins for state employees in December.
"The problem has been that, over the long term, management has been too timid," said Mike Greenfield, who served as Oregon Department of Administrative Services director for the last 18 months of John Kitzhaber's second term. "The union has done a very good job of representing employees. The management ... has been a weenie."
For their part, unions acknowledge that the labor cost dilemma is daunting and real. But they want to focus on fairness: The current economic crisis was largely a Wall Street creation, and their members are being scapegoated for a revenue problem that is a product of an unbalanced state tax system.
Focusing on pay cuts, the unions say, is a race to the bottom of the pay barrel. Now that private sector workers have been stripped of reasonable retirement and medical benefits, the next corporate effort is to privatize the public sector, they say.
Unlike most private sector employees, most state union workers can strike. That hasn't happened in Oregon since 1995, but union leaders say their members are willing if pushed too far.
"In the past, we have heard the benefits are a strike issue," said Heather Conroy, incoming executive director of the Service Employees International Union Local 503, which represents 18,000 state-agency employees and 4,500 university workers.
Here's a menu of potential costs cuts and some of the potential challenges:
1. Freeze cost-of-living increases. State workers usually receive increases to reflect inflation, or annual increases in prices of consumer goods. Since 1992, they've ranged from 2 to 3 percent a year, though state workers gave up such increases in eight of those years, including the past two. Freezing so-called COLAs again for two years would save the state $114 million.
State employees' base pay is already low compared to the private sector, though it still exceeds neighboring states except California. A long string of pay freezes could exacerbate the public-private imbalance, making Oregon's pay rates less competitive.
2. Freeze step increases indefinitely. Step increases are like credits for experience. Each step represents a 4.75 percent raise, and most state jobs grant nine over time, for a total salary increase of more than 40 percent from the bottom to top step. State workers view them as boosts on a salary scale promised them as part of their job offer. Critics see them as automatic raises in addition to cost-of-living adjustments.
Unions point out they've agreed to no step increases in three of the past eight years, mostly to preserve health benefits. Freezing them again would save the state about $53 million through 2013, Kulongoski's office estimates. But it would also set about two-thirds of state employees back compared to private-sector pay rates.
Even eliminating all pay increases -- steps and COLAs -- for two years would address less than half the projected 15 percent growth in labor costs, state officials say.
3. Reduce or eliminate the state's 6 percent retirement contribution. In 1979, with the state mired in a recession and double-digit inflation wreaking havoc on family budgets, state workers agreed to give up a pay increase. In return, the state agreed to pick up its employees' required 6 percent contribution to the Public Employees Retirement System.
That 6 percent contribution, called the pickup, remains today, though the contribution is now directed into an individual member account that supplements the state's regular defined benefit retirement program. It's a benefit rarely seen in the private sector -- an employer contributing 6 percent of pay to a 401(k) plan, with no matching contribution demanded from workers.
At the time, "it wasn't an easy thing to get the workers to agree to" said Ken Allen, executive director of the American Federation of State, County and Municipal Employees Council 75, which represents 6,650 state workers. "We had to really explain this was a good thing."
That pickup looms as an easy target for the next governor to extract concessions. It's not a legally required payment, and some school districts have cut it. Altering it wouldn't change the health of the pension fund, as the pickup goes into supplemental accounts. But it would be a substantial savings.
This summer, Kulongoski talked about cutting half the pickup, which would save state agencies some $134 million over two years. Lately, his office has taken a harder line.
"We're saying that should go away," said Tim Nesbitt, chief of staff for Kulongoski, who was the service employee union's lead negotiator with the state during the 1995 strike. Such a reduction would save about $260 million for state agencies and schools.
"We can't afford to have two pension plans," Nesbitt said.
4. Require workers to help pay the premiums for their medical insurance. Oregon is the only state that doesn't ask full-time workers to pay part of the health insurance premiums or deductibles for themselves or family members. Most school employees in the state do. Private-sector workers chip in 20 to 30 percent of their pay, on average, toward premiums for single and family coverage respectively, according to a 2010 U.S. Department of Labor survey. Government workers elsewhere chip in 11 to 27 percent.
Oregon public employee unions say fully paid health benefits are so important, they've taken repeated pay freezes to maintain them. AFSCME's Allen notes those benefits equate to tax-free pay.
Yet health benefits now represent one-fifth of the average state employee's compensation. Those costs are expected to increase 9 percent a year.
So far, examples put forth by Kulongoski's office call for modest employee contributions -- only 1.5 percent of salary, with offsets for healthy behaviors and employees making less than $60,000 a year. The estimated savings: only $8 million.
Union leaders and Nesbitt say other savings can be made by improving healthy behaviors, increasing costs for nonessential procedures and other tweaks to the plan. But estimates on those savings aren't clear.
5. Extend pay cuts to schools. State and university employees only account for one-third of the $7.3 billion general fund money expended on payroll. The rest goes for pay and benefits at K-12 school and community colleges around the state.
But the state doesn't control how that money is spent or have any role in the collective bargaining process.
Lawmakers will have to rely on school districts to make a chunk of their general fund cuts. One recommendation from the governor's reset report is to ensure any compensation reductions negotiated with state workers carry over to school employees, perhaps by placing conditions on the release of general fund dollars.
The problem with that scenario is that school employees have significantly different pay and benefits. Becca Uherbelau, spokeswoman for the Oregon Education Association, which represents 47,000 school employees around the state, said the majority of school employees pay out-of-pocket costs for health insurance. Moreover, employees in at least 80 districts pay their own 6 percent retirement contribution.
Oregon's average teacher salary ranks 17th nationally, according to the National Education Association. At $55,000, it sits just above the national average.
Uherbelau cited national studies concluding that teachers are underpaid relative to other workers with comparable education and experience levels. Meanwhile, she said, Oregon's teachers have consistently made concessions to help the state balance past budgets.
One-size-fits-all mandates to deal with compensation issues that differ widely by location simply won't work, she said.
"We are realistic. We recognize there's more to do, sacrifices will have to be made and shared," she said. "But we want to ensure that local school districts, leaders and teachers can make the choices that are best for their schools and their communities.
Where John Kitzhaber stands on public pay
Kitzhaber -- the union-Democratic endorsed candidate -- presided over the service employee union's last strike, a weeklong event in 1995 that shuttered DMV and other services. It came after voter-approved Measure 8 eliminated the 6 percent contribution to worker retirement accounts. State workers wanted a 6.5 percent pay hikes in its place.
It's not clear what role the strike played in resolving the dispute. The union ended the walkout a week before both sides reached an initial agreement on a phased-in 7 percent pay increase. Weeks later, a state judge ruled Measure 8 unconstitutional, and Kitzhaber and Republican legislators demanded the union renegotiate for lower pay increases.
Kitzhaber has said he'll get tough at the bargaining table this time around.
He frequently notes that the two largest employee unions supported his opponent in the primary.
"Quite frankly I think they understand this is coming," Kitzhaber said in a talk this month to the Oregon Medical Association. But he's not offered specifics on what concessions he'll seek. Kitzhaber has said the state's 6 percent retirement contribution, salary step increases, cost of living adjustments and health benefit costs will all be on the table.
His plan calls for "value-base cost sharing" of health benefits, but is not clear on whether that means state workers must contribute toward premiums. "That conversation happens around the negotiating table," spokeswoman Jillian Schoene said. Kitzhaber declined, through Schoene, to be interviewed for this story.
Where Chris Dudley stands on public pay
The Republican candidate for governor has accused Kitzhaber of being too close to unions to make hard, specific recommendations on compensation cuts. Dudley says he doesn't want to demonize state employees, or take away from their hard work, but the state faces a simple reality at the bargaining table.
"It's a tradeoff," Dudley said in an interview Friday. "Either you're keeping more employees at a lower amount, or you have fewer employees through some form of layoff. My preference is to have a shared sacrifice and keep more employees in their jobs, especially in this economic climate." That's not the way unions have typically reacted to budget cuts, preferring layoffs, which are temporary, to big pay or benefit cuts, which can be permanent.
Dudley says he'd be looking for state employees to share in paying their health insurance premiums. He has mentioned a 16 percent figure in the past, but said Friday that whatever the amount ends up being, it could kick in progressively, with higher-paid employees paying more. He also wants to explore a "cafeteria plan," where employees can choose among a variety of options, and participate in managing their own costs through a health spending account.
On PERS, he wants to eliminate some or all of the 6 percent pickup. For PERS beneficiaries who live out of state, he wants to eliminate extra benefits meant to offset the impact of state taxation. He also likes the idea of changing the system's service crediting rules so employees who work part time for years, such as legislators, can't suddenly qualify for a gold-plated pension by serving a three-year stint in a fulltime job at the end of a career.
While his experience as a labor negotiator for the NBA players union doesn't directly translate to the state's collective bargaining process, Dudley says all negotiations come down to trust, and establishing the notion that everyone is looking for a sustainable package going forward. In that light, he wants the state to put everything on the table, and keep the focus on total compensation.
"We have to get away from the idea that we're going to negotiate salary, but allow medical and retirement to run off on their own," Dudley said. "We have to bring it all under the same umbrella and try to craft the best win-win solution possible."
