Achieving Fiscal Sustainability

by Jay Bozievich

As Lane County contemplates how to increase revenue to support public safety and Portland discusses how to fund education, it is time to discuss how to achieve fiscal sustainability for our public agencies here in Oregon. Missing from these discussions is the root cause of the current instability, the overheated growth in the cost of labor to fulfill the missions of these agencies.

Labor, salary and benefits, accounts for the majority of spending by public agencies. Over 80% of spending by school districts is for labor. Lane County personnel expenses amounted to 60% of the general fund budget. For Public Safety, labor costs are over 64% of the budget.

Unfortunately, this category of expense has been the fastest growing for governments over the last decade and is projected to continue as the fastest growing. Labor contributes to Lane County’s current projected rate increase of 6% per year. Similar rates of expense growth are projected for local school districts, municipal governments, community colleges and state government. Yet revenue growth projections are for 3%, creating a structural deficit for all levels of government in Oregon.

Let us examine why public labor costs are increasing at twice the rate of inflation. The first contributing factor is the Public Employees Retirement System or PERS. PERS charges public agencies a percentage of payroll to pay for the benefits promised by the system. That rate has gone from 8.88% in FY98 to whopping 20.72% projection for FY06 for Lane County. The PERS Board is projecting another 4.5% increase in FY07.

The second contributing factor is health insurance. Lane county projects double digit growth rates in the cost of providing health insurance to employees. These increases are driven by the experience ratings of agencies and what percentage of the costs of the premiums the agency pays.

If the employees of an agency file claims for more money than the insurance company charged in premiums, then the insurance company will charge a higher premium the next year in an attempt to break even. If the agency pays all or most of the premiums for the employees, then the agency will bear the costs of the increase.

Currently, most public agencies pay a high percentage of the premium costs for health insurance for plans that have low co-pays and deductibles. Therefore, employees see little direct impact from heavy utilization of health care and subsequent insurance increases.

These non-salary costs of labor for retirement, healthcare and other benefits are lumped together under the acronym OPE, or Other Personnel Expenses. The Bethel School District 52 saw an OPE jump from 45% of total salaries to 53% last fiscal year. That equates to a 5.5% increase in labor cost even before any increase in base salaries.

Speaking of base salaries, many public employees are under contract as part of collective bargaining units or unionized. Non-union employees like management often have pay and benefits linked to the union contracts in some way.

Many of these union contracts are currently set-up with pay grade steps. Employees are moved up to the next step of the ladder for every year of experience they have until reaching the top rung. These steps can be as little as 1% to as much as 3.75%. These steps are automatic annual increases set forth in the contract.

Union contracts also include cost of living adjustments or COLA’s at either a set percentage or indexed to a benchmark. These COLA’s are on top of the step increases. Usually creating automatic annual raises in base salaries well above the rate of inflation.

So, to review, we have base salary rates that increase above the rate of inflation, health insurance premiums rising at double-digit rates, and PERS rates well over 20% of base pay and increasing. Is it any wonder that the cost of government is increasing at 6% or more when labor is such a high percentage of the budgets?

The problem is that the tax base to pay for this rate of increase is growing at less than half that rate. The tax base for Oregon is our state economy and unfortunately it is not growing at a rate that can sustain the cost of government growing at 6%.

One measure of Oregon’s economy is total personal income. The growth of total personal income in Oregon is just over 2%. Even if we increase the percentage of the income taken to support government, that amount will still grow slower than current expenses unless we do something about the expense growth rate.

To restore balance we need true reform of the PERS programs. Health insurance should return to a system that encourages healthy choices while covering catastrophic care. Public employee contracts need to be structured to promote performance based pay rather than automated increases.

Public employees should also be subjected to competition from private non-profit and for-profit businesses that can supply equal services. This may require legislative changes to provide for that competition like easier school choice options. Competition would provide an external governor to public labor costs.

If we truly wish to have fiscal sustainability for public safety, education and other government services, then the elected officials and public employees of Oregon must be willing to work together to resolve the ever increasing cost of public labor.

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