Charles Chieppo is a research fellow at the Ash Center of the Harvard Kennedy School.E-mail: Charlie_Chieppo@hks.harvard.edu
Mention Wisconsin Gov. Scott Walker, and most government and policy types think of his effort to narrow the scope of collective bargaining for his state's employees, an effort so controversial that he now faces a June 5 recall election. But Walker also has established a program of merit-based raises and bonuses that could be a step toward correcting often-perverse public-sector incentives.
Some view the program as hypocritical in the face of Walker's previous actions and the $143 million shortfall the state now faces, as well as measures that have reduced the amount some state employees take home by forcing them to pay more toward health insurance and pension benefits. And the program raises the suspicion among some of Walker's critics that raises might be handed out based on cronyism rather than merit.
But if handled correctly, the benefits could far outweigh the $765,000 cost of the bonuses and raises given out so far this year and their effect on Wisconsin's budget shortfall.
For decades, public employees accepted lower pay in return for job security and generous retirement and health benefits. But today, many public employees earn as much as their private-sector counterparts who do comparable jobs, and the cost of pension and health benefits is driving some governments to the edge of insolvency.
The best way to correct the problem is by improving worker productivity. Public employees are routinely treated the same whether they are outstanding or barely adequate, and they are in pension plans that can make it hard to leave once they have been in the system for a few years. The result is a workforce that is often older than the private sector's and that values security over advancement.
Critics of rewarding high-performing Wisconsin state employees need not look far to see the benefits it can bring. When Indiana had an unexpected $1.18 billion surplus last year, Gov. Mitch Daniels announced that he would give some of it back to employees in one-time bonuses. Instead of giving everyone the same amount, 90 percent of state workers got between $500 and $1,000 depending on their performance. After going three years without a raise, it was the second such bonus he handed out in a year.
State governments can't change the cyclical nature of the economy, but Daniels' prudent management is one reason Indiana avoided much of the fiscal pain other states have felt during the Great Recession. To his credit, Daniels realized that state workers also deserved some of the credit.
Employment isn't the only area in which public-sector incentives are often misaligned. A classic example is an agency that is underspending its annual budget and then spends wildly in the waning days of a fiscal year rather than being forced to return the difference and potentially face future cuts. Encouraging thrift by allowing the agency to keep part of what it saves would reduce the immediate savings while creating an incentive for far more in future savings.
Massive unfunded pension and health-care liabilities combined with better pay have pushed traditional government employment systems to the breaking point. Although introducing pay-for-performance might reduce savings from austerity measures in the short term, it's just one of the ways in which government must realign incentives if it hopes to get back on the path to sustainability.