Being a cop, George Beattie doesn’t use loaded expressions lightly. But when he considers the terms San Jose Mayor Chuck Reed is dictating to city workers, the president of the San Jose Police Officers Association can’t help himself. “He’s basically putting a gun to our head,” Beattie says. “He is saying either do what we say, or this is what is going to happen.”

San Jose has suffered 10 straight years of budget shortfalls. It will certainly face another one in the new fiscal year just getting under way. Like so many other cities, San Jose is looking at retirement health and pension costs that are set to grow at a rate that threatens to swallow enormous chunks of the municipal budget.

That’s why Reed has just declared a state of “fiscal emergency.” He has put forward a proposal that would raise the retirement age for city workers, abolish cash payments for sick leave and recalculate how pension benefits are accrued. Because the plan changes retirement rules for both current workers and new hires, it’s certain to be challenged in court -- that is, if it passes muster with voters first.

Beattie claims to be certain of the outcome. “If he puts this on the ballot, and he will,” the police officer says, “there’s not a doubt in my mind that people will vote this in.”

Reed’s proposal may be onerous for city workers, but it’s not really so different from what state and local employees are seeing all over the country. Due to budget constraints over the past three years, hiring and wage freezes have become common while unpaid furlough days are now nearly de rigueur. More than 300,000 state and local workers have lost their jobs in the past two years. This year, they may be joined by 450,000 more.

On top of all this, elected officials in states such as Wisconsin and Ohio have directly challenged the ability of their workers to have a say in how budget cuts will affect them -- by trying to strip them of their collective bargaining rights. All in all, this set of circumstances represents the biggest challenge public-employee unions have ever faced.

If the stakes were not high enough already, union leaders in the public sector are attempting to raise them even higher. The current circumstances, they say, represent a challenge to their workers -- and, indeed, to government programs in general. They also consider themselves to be on the front lines of a broader battle between corporations and the wealthiest Americans on one side, with union members and middle-class workers on the other. “This is a bigger fight than just public-sector unions,” says Lee Saunders, secretary-treasurer of the American Federation of State, County and Municipal Employees (AFSCME). “It’s a fight about the direction of the country.”

State and local retirement accounts might be more than $1 trillion in the red, but union leaders such as Saunders say it’s unfair to blame government workers when legislatures failed to make scheduled payments to pension funds over the years. Better to blame Wall Street, they say, for racking up record profits even as large-scale investment losses have blown a hole through pension accounts. “Public employees are being blamed for problems they never caused in the first place,” says Randi Weingarten, president of the American Federation of Teachers (AFT), who, like Saunders, says Wall Street bears greater responsibility. “There’s a very coordinated, mean-spirited strategy to use a budget problem to try to divest ordinary people of any voice in the electorate or the workplace.”

It’s true that the Republican leaders who have sought to strip unions of their bargaining power are working hand-in-glove with advocacy groups that have deep backing from business interests, such as Americans for Prosperity and the Club for Growth. Those groups have not only argued that public-sector pension plans are too generous to be sustainable, but have also sought to portray government-employee unions as recalcitrant for trying to hold onto such benefits. “The other side has been very successful with divide and conquer -- ‘look at the greedy unions, look at what they’re getting and you’re not,’” says Stephen Madarasz, a union official in New York state. “Nobody should ignore the fact that corporate America is in many cases trying to undermine the middle class.”

Union leaders like to point to polls showing that most of the public supports collective bargaining rights for government workers. They also note that approval ratings for anti-union governors such as Scott Walker of Wisconsin, John Kasich of Ohio and Rick Scott of Florida have fallen into “buyer’s remorse” territory. “They’re really overreaching,” says AFSCME’s Saunders. “I believe the majority of Americans are recognizing that.”

A key test of that belief will be the July 12 recall elections of several Wisconsin senators who helped push through Walker’s plan to strip most unions of collective bargaining power. Union leaders also have taken heart from the results of a May special election in upstate New York, where a normally Republican district was captured by a Democrat who railed against the congressional GOP’s plan to turn Medicare into a voucher program. That election spoke to the “whole notion” of pensions, Weingarten says. “People in America get that Medicare is one of the only retirement security programs they’ve got,” she says. “They don’t want it touched.”

At the same time, however, plenty of polls suggest that most of the public sees the kinds of benefits that government workers get -- and private-sector workers often don’t -- as rich and unaffordable. The unions are right to see that they are in a political fight against enemies with an agenda beyond shoring up budgets. But that doesn’t mean they’re bound to win. Polls indicate that support for public-sector unions is at an all-time low.

“The body blows the unions are suffering now in states like Wisconsin can be overcome if unions are able to get their base out, change the narrative somehow and defeat their political enemies in 2012,” says Richard Kearney, a professor of public administration at North Carolina State University. But he notes that there has been a strong conservative tide in recent state elections. “They’re facing long odds, because there is this toxic combination of business and Republicans working against them.”

It’s not just Republicans who are demanding that unions change with the times. Democrats such as Govs. Dannel Malloy of Connecticut and Andrew Cuomo of New York are demanding that unions give up billions of dollars in concessions or face workers being laid off by the thousands. “Government can’t blame the unions in total,” says Patrick O’Connor, a Chicago alderman. “Government is what put the benefits in place. But I don’t think anybody who looks at pension plans thinks they can be funded at the levels they’re at.”

For decades, public-employee unions have been able to associate themselves and their members with the services that the public enjoys. They’ve framed any cuts to their wages and benefits as an attack on the teachers of our children, the hospital workers who tend the sick, and the police and firefighters who save our lives. “The unions did control the narrative,” Kearney says. “They had public buy-in.”

But that kind of argument is harder to sustain when government programs are being cut across the board. Politicians make the case that by cutting worker salaries and benefits, they’re not weakening public services but trying to protect them. If they don’t cut worker benefits, they say, they’ll have to close more pools and libraries and let the roads remain rutted with potholes. “If you’re a local taxpayer,” says Geoffrey Beckwith, executive director of the Massachusetts Municipal Association, “and 20 cents of your property tax dollar goes to pay for benefits that are richer than you get, and that’s going to rise to 25 cents, then the public at some point is going to have a reaction that actually would do much more damage overall to the public-sector workforce.”

Both chambers of the Massachusetts Legislature -- which are both overwhelmingly Democratic -- recently voted to block collective bargaining rights over health-care plans at the local government level. The change was meant to address skyrocketing costs for towns and cities. Union leaders in the state said they were disappointed their nominal friends in the Legislature would make such a move. Future electoral backing would be predicated on how they came down on the measure, the unions warned, calling it an attack not only on their rights but also on the middle class itself. “You are either on the side of collective bargaining for the workers who have been willing to compromise on this issue, or you are against those collective bargaining rights and want to reward intractable, uncompromising management advocates,” Robert J. Haynes, the president of the Massachusetts AFL-CIO, wrote to legislators.

But the problem, Beckwith argues, is that the unions had been unwilling to compromise. Until now, they held veto authority over health plans offered by local governments and seldom had been willing to brook change, even at the threat of layoffs. The Massachusetts legislation would give cities and towns the ability to alter health plans, but they would have to remain at least as generous as those offered to state government workers in terms of co-pays and deductibles.

Massachusetts unions were trying to ride a wave of sympathy that carried all the way east from Wisconsin. Union leaders in Wisconsin, as elsewhere, have argued that there shouldn’t be a “race to the bottom” in terms of benefits. But the reality is that 80 percent of workers in the private sector do not have defined-benefit pension plans, and fewer and fewer of them are getting health insurance coverage through employers. There may be limits as to how much traction public-sector unions can get with a solidarity argument when private-sector workers resent their members’ benefit levels. “This is one of the major risks that union leaders are taking, by not recognizing that these are new times,” Beckwith says. “When society overall sees a change, it’s unsustainable for one segment to try to remain as an island.”

Union officials and their allies note that people working in government aren’t getting rich. Benefits have gone up but wages haven’t, says David Madland, director of the American Worker Project at the Center for American Progress. This means public-sector worker compensation has declined as a share of state costs over the past 20 years. The average defined-benefit pension pays out less than $25,000 a year, according to AFSCME. “Public-sector unions are being scapegoated for budget problems that were mostly not of their making,” Madland says. [For more on public payrolls, read "Who's the First To Go?".]

The whole idea of collective bargaining, after all, is to come up with ideas that both labor and management can live with. Union leaders complain that government officials are being high-handed when they come to the table demanding that workers either accept large-scale layoffs or serious givebacks. In New York state, for instance, Cuomo has warned his unions that if they don’t come up with $450 million worth of cuts, he’ll have to lay off 1,900 workers. It doesn’t have to be “an either/or,” says Madarasz, who is the director of communications for the Civil Service Employees Association in New York, AFSCME’s largest chapter. “If both sides are approaching things in good faith,” Madarasz says, “there are a thousand solutions you can come up with.”

The problem, say both critics of the unions and plenty of their friends, is that for too long public-employee unions have resisted accepting the sort of changes that would help stave off financial disaster. Many mayors and governors will tell you that some of their unions “get it” and recognize that the times call for a fundamental restructuring of public employee contracts. But others have sought to preserve wage levels and benefits that were hard-won over the decades, even as the financial terrain changed and made them both fiscally and politically unsustainable.

It’s difficult for union leaders to come back to their membership with packages that represent no increase in pay -- or actual cuts. Union leaders face the prospect of their members not only rejecting austere contract agreements, but ousting them as well. And laid-off workers, however much they are missed, will not vote in the next union election.

In San Jose, Mayor Reed is warning that he will have to lay off two-thirds of the city’s workforce if he can’t achieve significant savings in retirement benefit costs. What consumed $65 million of the city’s budget a decade ago already accounts for $250 million and half the city’s budget shortfall. Retirement costs could rise to as much as $650 million annually over the next few years, Reed says.

In Reed’s mind, it’s simply a math problem. Last year, he convinced six of the city’s 11 unions, representing about a quarter of its workforce, to accept a 10 percent salary cut for employees. But even if the police and firefighters accept that kind of cut again, he says, it will only represent half the amount that pension and retirement benefit costs have increased. “We are draining money out of services and pouring them into retirement benefits,” Reed says. “However you define unsustainable, it’s unsustainable.”

The mayor is convinced the public will be with him. San Jose voters and taxpayers think it’s reasonable, he says, to raise the retirement age, over 20 years, to 65 for most government workers and to 60 for those in public safety. Some of the unions are betting he’s wrong, rallying against his fiscal emergency proposal and even importing a pro-union state senator from Wisconsin to raise the argument that Reed’s plan represents an attack not only on city workers, but on the broader middle class.

Beattie, the president of San Jose’s police union, is nervous that that kind of strategy won’t carry the day. The San Jose Police Officers Association has hired its own auditors and forensic accountants to examine the city’s books. He knows the problem is real, but he blames Reed for not giving serious weight to a pension reform proposal that the police union has come up with that would save the city $100 million over the next 15 years.

Beattie can cite plenty of examples of when his union was willing to make concessions on retirement pay formulas, increased health premium contributions and pay cuts. Reed’s declaration of a fiscal emergency is “political in nature and has nothing to do with solving the problem.” Still, if Reed is willing to break faith and bypass the bargaining process, Beattie thinks the mayor can win. “Right now, we’re the haves,” he says. “The people without jobs are the have-nots.”

Union leaders nationwide are betting that the argument will play out differently. Casting themselves as the have-nots, they hope to prevail over attempts not only to cut their members’ wages and benefits, but also to block their basic right to bargain collectively over compensation. “It’s a political fight and it’s about power,” says AFSCME’s Saunders. “This is a power grab, and folks want to take us out of the picture so we will be silent and they can do what they want to do.”

Whether or not the charges are fair, it’s clear that unions are going to have to respond to the argument that government employment grants benefits that are out of line with what’s offered to workers in the private sector and unaffordable in the current budget environment. Weingarten, the AFT president, says public-sector unions are in for a “big fight,” but she says she’s grown more confident that they’ll prevail since the political backlash against governors such as Wisconsin’s Walker and Ohio’s Kasich has set in.

Public employees in every state would have won mandated collective bargaining rights under the federal Public Safety Employer-Employee Cooperation Act, which came close to passage in 2008. But that bill’s chances ended with the death of its sponsor, Sen. Edward M. Kennedy of Massachusetts, and the Democrats’ loss of their House majority in 2010. Instead, public-employee unions are watching collective bargaining rights being chipped away, not only in the high-profile fights in the Great Lakes region, but also in other states such as Nebraska and Tennessee.

Unions may be able to turn the tide through their political efforts, with many of them, such as the International Association of Fire Fighters, shifting attention and resources away from federal campaigns and toward state contests in 2012. There are now more unionized workers in state and local government than in the private sector, but it’s hard to see how they can grow either in number or strength over the coming years. “Right now, we’re going to see a race between the potential impact of these policies, which will dramatically weaken union power in these states,” says David Madland, the American Worker Project director, or “whether, before these policies actually kick into effect, unions can build on public support for their basic positions.”

“It’s sort of even odds” as to the question of whether public-sector unions will be significantly weakened over the next several years, says Rick Kearney, the North Carolina State political scientist. “People are saying it’s an existential threat, and it is, if the unions can’t adjust course here. They have to adapt, and they have not, as we now see they should.”