How Did 2012 Treat Public Employees?
Unions took a blow in Michigan this week. We review how the entire year impacted unions as well as government hiring, pensions and retirement.
This year was a mixed bag for state and local government workers.
Legal and legislative attacks on public employee unions -- which occurred most recently in Michigan as the state became the 24th with a "right-to-work" law Tuesday -- continued from the year before, and lingering budget cuts meant more reductions to health and retirement benefits.
On the bright side, many baby boomers delayed retirement, allowing governments to maintain institutional knowledge. And by the end of summer, Gallup polls were showing an overall increase in state and local government hiring for the first time since the start of the economic crisis.
But by September, the U.S. Department of Labor was again reporting net job loss despite the summer uptick that was largely driven by increases in education employment.
We review how 2012 impacted hiring, pensions, retirement and unions as well as make some predictions for 2013.
Since the recession hit, hiring in the public sector has been dismal. But as the economic recovery rolls on, state and local government hiring is beginning to pick up. After months of net job losses, an August Gallup poll revealed a +3 job creation index, meaning that 3 percent more state and local government workers reported job creation rather than job loss. During its all-time low, the recession had produced a job creation index of -28 percent for states and -26 percent for localities.
Also in August, U.S. Census Bureau data showed that 31 states are hiring more or cutting fewer part-time employees -- an indication that there’s increasing confidence for hiring going forward. But states are still cutting full-time positions or hiring those positions back more slowly. In Utah, for example, part-time employment increased 18 percent in 2011 (the most recent data available) while full-time employment increased only 2.4 percent. This could prove beneficial to younger employees who might desire more flexible employment, but it also likely means that boomers who were considering retirement might opt to stick around in a part-time position, leaving fewer jobs open for up-and-coming millenials.
Despite positive national employment news, things aren’t picking up everywhere. Not taking into account teachers or local school district employees, Minnesota has 9,000 fewer city and county employees than it did 10 years ago -- with 3,500 of those positions having been cut since 2008. In states, cities and counties that are still losing jobs, some positions are easy to cut (like building inspectors who aren’t as necessary since the housing bubble burst) while others (like police and fire) draw complaints when roads aren’t plowed fast enough or no one responds to a fender-bender. The unparalleled job numbers were reflected in the November jobs report, which shows that state governments added 6,000 jobs after losing 15,000 in October -- all while local government hiring remained mostly unchanged.
Pensions took another big hit in 2012. Nationwide, state and local pension plans are still facing a more than $1 trillion shortfall, and for the roughly 27 million current and former employees who will draw at least a portion of their retirement funds from these plans, it could mean significant changes from what they had anticipated.
A study by the National Association of Government Defined Contribution Administrators revealed that 43 states made changes to their pension plans this year. These changes included increasing the amount that current and new employees must contribute; raising the age or length of tenure required to be eligible for retirement; reducing cost-of-living adjustments (COLA) for current and new employees; reducing pension benefits; and offering new employees a defined-contribution (DC) plan rather than the typical defined-benefit (DB) plan -- or a hybrid of the two.
These changes have resulted in a range of levels of pain across the country. In Central Falls, R.I., for example, recent retirees will see their pensions cut up to 55 percent. In California, a recently signed law raises the retirement age, caps annual pension payouts and requires employees to contribute at least half of their retirement amount.
In places where the government hasn’t taken direct action, voters are. In June, citizens in San Jose voted to reduce retirement benefits for city employees while San Diegans voted to eliminate pensions for new hires -- instead opting for a 401(k)-style plan.
In most state and local governments, however, contractual obligations prohibit the government from reducing benefits that current state workers will receive upon retirement. But a recent report from the Center for Retirement Research found that it’s possible to circumvent some restrictions. In New Jersey, for example, a judge gave the government authority to stop COLAs if it is financially necessary.
As mentioned earlier, changing pension plans coupled with changing health benefits is putting retirement on hold for some. In August, the Center for State and Local Government Excellence and the TIAA-CREF Institute released a joint report that found only 19 percent of full-time public employees are very confident with their retirement income. Fifty-seven percent of those surveyed said they now expect to work longer than they had anticipated, while 72 percent said it’s likely that they’ll seek paid employment after retiring from the government.
This is a positive and a negative for government. With smaller budgets, training and recruitment are mostly on the backburner, so the longer governments retain their long-term employees with the most institutional knowledge, the better. Of course, this leaves fewer positions for up-and-coming employees who -- frustrated by the lack of advancement -- may opt to join the private sector.
The U.S. Bureau of Labor Statistics reports that the number of state and local government employees under age 25 has dropped to 13.2 percent. This leaves governments in a difficult position: The slow economic turnaround doesn’t give an indication of when the wave of baby boomer retirements might begin, and they’re also left with fewer employees to move into those positions when they do.
If you’re a member of a public employee union, 2012 likely was not your year. Strikes in Chicago and Detroit did not pan out entirely the way the unions wanted them to, and election season brought even more pain (but also gain).
The national Republican Party revised its platform to call for a federal “right-to-work” law that would stop unions from being able to require employees to pay dues and fees. With the controversial passage of a right-to-work bill in Michigan this week, 24 states now have such laws. The GOP also ceased their endorsement of employees’ right to unionize and indicated a belief that collective bargaining is a threat to state and local government.
Meanwhile, President Barack Obama -- while inherently pro-union as a Democrat -- has said that he understands the benefit of collective bargaining in the public sector, but has also asked unions to join in the “shared sacrifice” that could include pay and benefit cuts. But rather than having those cuts imposed by employers, Obama would prefer them to be negotiated with the unions. On the right-to-work issue, however, he came out against Michigan's effort to pass such a law, remarking that, "These right-to-work laws have nothing to do with economics and everything to do with politics."
In other blows to public unions, Michigan voters rejected a November ballot measure that would have guaranteed public workers the right to organize and collectively bargain. Wisconsin voters kept Gov. Scott Walker in office during a historic recall election in June after he signed a controversial budget bill last year restricting collective bargaining rights. And in Indiana, the Legislature passed a right-to-work law, making it the first state in the Midwest to pass such a law. Gov. Mitch Daniels had already eliminated collective bargaining in the state back in 2005.
What to Expect in 2013
Pension and health benefits, salaries and hiring are likely to remain similar to this year, but it depends on where you live. Standard & Poor’s predicts that state and local economies will grow more slowly in 2013 than in 2012, especially in the New England, Mid-Atlantic, Great Plains, Great Lakes and Pacific regions. Any governments that rely heavily on federal aid or tax revenue are likely to feel the greatest pinch, which, as it was in 2012, will likely be passed on to current and former employees. The South Atlantic, East South Central, West South Central and Mountain regions of the country are expected to see economic growth next year, but there is no indication that will translate into better pay and benefits.
The biggest impact on public-sector employees could come from the so-called “fiscal cliff” -- the expiration of Bush-era tax cuts and simultaneous sequestration budget cuts that take effect January 2013. If Congress and Obama don’t agree on a deal to avoid falling off the cliff, the budget cuts would hit teachers and law enforcement hardest, with layoffs, furloughs or program cuts likely.
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