Rising personnel costs are weighing down cities

July 26, 2012

Bloomberg’s Romy Varghese wrote an excellent piece about escalating wages and pension costs for public safety workers that mirrors much of what I’ve been writing about several bankrupt California cities. As municipal revenues slowly inch up, mandated wage and pension increases have been ravaging budgets:

Rising personnel costs have helped drive revenue-strapped cities toward insolvency from coast to coast.

“A majority of their costs are tied up in people,” said Christopher Hoene, research director for the National League of Cities in Washington. “If you look at any organization of any size around the country, you’ll see anywhere between 60 to 80 percent of their costs are in personnel-related expenditures.”

A league survey in 2010 showed 79 percent of cities cited increasing employee-pension expenses as a source of budget pressure, up from 61 percent in a 2003 survey. Tax increases and service rollbacks, which can bog down economic growth, lie in wait for those that can’t control labor expenses, Hoene said.

Of course, controlling costs when there are high levels of unionization is very difficult. The BLS has the figures on unionization in the public sector:

Within the public sector, local government workers had the highest union membership rate, 43.2 percent. This group includes workers in heavily unionized occupations, such as teachers, police officers, and firefighters.

Outside of a bankruptcy proceeding, cities and towns must either attempt to negotiate with unions or wait until a multiyear contract expires. Stockton, California and Scranton, Pennsylvania are examples of communities that unilaterally imposed wage reductions on union workers and are now facing court-imposed, multimillion-dollar payments to make up those wages. These settlements have placed enormous strains on already unbalanced budgets.

As state and local government employment boomed from the early 1980s to 2008, unions had little trouble negotiating more generous benefits, such as annual cost-of-living increases for wages and pensions. But the tide has turned, and it’s likely that we’ll see more of this:

In Phoenix, budget pressures driven partly by personnel costs led lawmakers to impose a 2 percent tax on groceries in 2010, said Sal DiCiccio, a City Council member. This year, he sought to restrain pay increases for union workers without success, he said.

“It’s up to political figures to say no,” DiCiccio said about dealing with union demands.

Brace for the fights to come.

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