Building an Economy that Works for Everyone

To fix the state budget, start at the top

From State Budget Cuts: Starting at the Top

By Dean Baker

Dean Baker, co-director of the Center for Economic and Policy Research (CEPR) and EOI Board Member

The elite media are on yet another jihad. They are determined to cut the pay and benefits of public sector workers who can still enjoy a middle-class lifestyle.

The idea that a schoolteacher or highway worker can retire with a pension of $2,000-$3,000 a month is directly at odds with their view of government. They believe that government exists to redistribute income from everyone else to those who already are rich and powerful. To these people, the money that is going to pay the wages and pensions of ordinary workers is money that could be in the pockets of the rich.

The economic crisis caused by the collapse of the housing bubble has created a great opportunity. State and local tax revenues plummeted as employment fell. Lower property values also meant lower property taxes. This meant that governments across the country suddenly faced severe budget shortfalls. This provided the opportunity to attack the pay and pension packages of public sector workers.

It is difficult not to admire the brilliance of this attack. The country’s elite, with the Wall Street high rollers at the forefront, wrecked the economy through a combination of incompetence, greed and outright fraud.

As tens of millions of workers are still struggling with unemployment, underemployment and underwater mortgages, this gang now turns around and starts demanding that middle-income workers take pay cuts and give up part of their pensions. This is like a child setting fire to his parents’ house and then complaining because dinner isn’t ready on time. But this is the way America now works, with the spoiled children on Wall Street calling the shots.

While there can be no doubt that many states face a serious budget squeeze as a result of the economic crisis, that doesn’t mean that we have to join their attack on teachers, firefighters and other public workers. Instead, we can go right to the top.

Most public sector workers get paid no more than their private sector counterparts, but there are nonetheless a small number of very well paid public employees. The Boston Globe recently reported on the 6,400 state employees in Massachusetts who earn more than $100,000 a year. Topping the list was a professor at the University of Massachusetts Medical School who earned almost $800,000 in 2009.

According to the Chronicle of Higher Education, there were 11 presidents of public universities who earned more than $700,000 in the 2008-2009 academic year. The top earner on this list was the president of Ohio State University who pulled down more than $1.5 million. That’s a lot of pension years for custodians or schoolteachers who are supposed to take big cuts to help state budgets.

There are many very high earners in the public sector if we look in the right places. Before we make a schoolteacher sacrifice part of the $25,000 pension that she worked for, maybe the President of Ohio State University should have his pay cut to less than $1 million.

We already know the counterargument: These people will go somewhere else if they didn’t get their huge salaries. For the most part this is probably not true, but in the cases where it is, there will be little loss to the state. After all, there are plenty of extremely bright hardworking people who still consider $200,000 a good salary. Besides, aren’t the budget cutters demanding that government will have to change; what better way to start than getting rid of some overpaid prima donnas?

This is not the only place to look for budget savings at the top. One reason that state pension funds have less money than they should is that they often overpay the people who manage their funds. This is not always an accident.

Wall Street honcho and former Obama adviser Steve Rattner agreed to pay $10 million to settle charges that he had made payoffs to public officials to get control of a portion of New York State’s pension fund assets. It is likely that public officials outside of New York have also been willing to sell off control of pension fund assets.

It doesn’t take many sleazy deals like this to add to real money. Suppose that corruption added an average of 0.5 percent to the management fees of public pension funds. If this is the case, then excessive Wall Street fees are costing public pension funds almost $15 billion a year.

States could prevent this sort of corruption by putting tight restrictions on management fees, requiring that they match the lowest cost in the industry. (Vanguard will manage an index fund for around 0.15 percent of the value of the assets.) Perhaps they should also require that all contacts between pension fund agents and bank representatives be video-taped and posted on the web so that everyone can know what sort of arrangements were made. Preventing Wall Street rip-offs could go a long way toward making up pension shortfalls, while bringing greater efficiency to the country’s financial sector.

We should never forget that the bulk of states’ budget problems are the result of the economic crisis brought on by Wall Street greed and incredibly bad economic policy. As much as possible, we should be trying to make the people at top pay for the damage they have caused. It makes no sense to beat up on schoolteachers, firefighters and other public sector employees who have to work for a living.

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