Three approaches to handling states’ fiscal problems 

Gov. Scott Walker’s efforts to restructure Wisconsin’s relationship with its public employees sparked a national debate over how to address states’ budget problems. The governor’s critics wrung their hands at the prospect that his “assault” on public employees and their unions would become a model for other states.

They had reason to fear that it might. As of last fall, state and local governments had 19.4 million employees. Wages and benefits make up 43 percent of state and local spending.

The states also face huge unfunded liabilities going forward. Using the states’ own assumptions (which understate the problem), the Pew Center on the States has found a $1.26 trillion gap between what the states have set aside for their pension and health care plans and what they’ve promised to their workers.

Covering that gap will necessarily crowd out spending on other things. It’s no wonder that governments across the country are seeking to reduce public employee compensation. To find real savings, states have been forced to open the hood of their employee retirement and health care systems — and changing these policies makes confrontation with government workers’ unions almost inevitable.

This spring’s budget battles have produced three models of reform. One is the structural reform enacted in Wisconsin, Ohio and Indiana, which seeks to reassert the authority of elected officials and government managers over government workers’ unions.

Even Democrat-dominated Massachusetts is flirting with such changes. Its statehouse recently voted overwhelmingly (111-42) to remove public-employee health care as a subject of mandatory collective bargaining.

With such newfound authority, states hope they will be able to make changes that will shore up state finances over the long term.

New York, New Jersey and California have adopted a second model. These states have refused to raise taxes and instead enacted austerity budgets, which cut public services and require government employees to make greater contributions to their benefits plans.

But they have studiously avoided tinkering with union privileges, fundamentally restructuring pension systems or otherwise undertaking longer-term reforms.

While this approach has mitigated confrontations between Democratic governors and their union allies, it does little to address the structural flaws in current arrangements that made the recession so hard on these states’ budgets.

A third model is represented by Connecticut and Illinois. Both states have raised taxes — Illinois’ 67 percent tax hike was the steepest in the state’s history — along with asking for concessions from public employees.

Both have avoided making structural reforms. Connecticut Democratic Gov. Dan Malloy says he wants to “spread the pain around.”

Surprisingly, the budget plans of Connecticut and Illinois have generated heated union opposition. Malloy is currently in a standoff with his states’ unions over concessions.

If they don’t give in to his demands, he is threatening to lay off 4,700 state workers starting next week. Democratic state legislators in Illinois have sought to shore up the most underfunded pension system in the country (spending on which will consume 18 percent of the state’s budget in 2012).

They have called for major benefits cuts for future workers, greater contributions from current ones, and even toyed with the idea of cutting benefits for current retirees. The state’s public-employee unions are outraged. They’ve begun to fight the proposals with a million-dollar ad campaign.

Ultimately, shrewd state governments will do more rather than less, sooner rather than later, to remake the contract with their employees. This will be painful — especially for Democrats elected with union support.

But act they must, not only to balance budgets now, but to provide citizens with good government at an affordable price in the future.

Daniel DiSalvo is a senior fellow at the Manhattan Institute and an assistant professor of political science at the City University of New York.

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