Last week our Ways and Means General Government Subcommittee took an in-depth look at the outcomes of last summer’s public employee labor negotiation. Some of those results were very good and others were pretty ugly.

The good outcomes included that the labor negotiations were based on the total amount of employee compensation. Prior to this most recent collective bargaining effort, separate discussions have determined salary and benefit agreements. This time the agreements were adopted as a package that was allegedly limited to a six percent overall compensation increase over two years. This was a significant step in the right direction.

Moreover, state public employees agreed to share in the cost of their health insurance benefits for the first time. The agreement calls for each state employee to pay five percent of the cost of their health insurance premium. Those employees on the lower end of the salary scale will be reimbursed for part of that cost.

Regrettably, from my perspective, there were a lot of ugly outcomes.

First, the negotiation ignored the cost of a previously negotiated salary “step” increase. When this 4.75 percent raise is included, the actual increased cost to Oregon taxpayers is about 7.4 percent rather than the stated 6 percent. This oversight resulted in a cost understatement for the current budget cycle of nearly 25 percent. That oversight is equal to $42 million, or enough to pay 300 average state employees.

Second, the agreement included two cost of living increases and another “step” salary raise. These three salary increases were phased-in to prevent this biennium’s total cost increase from exceeding the 6 percent target. However, the same adopted salary increases, extended over the entire 24 months of the next budget period, will escalate to a 12.5 percent raise in compensation. The price of those salary increases during the 2013-15 biennium will be an additional $955 million in all funds payroll costs. This locked-in cost increase is equal to the total compensation of more than 6,800 average state employees.

Third, the agreement assumes that the Public Employment Benefit Board will be able to limit increases in health insurance premiums to no more than 5 percent per year. Historically, that Board has adopted annual premium cost increases that average 9 %. In the event that historic increases actually do occur, the projected payroll costs are understated by about 1.5%.

Fourth, the agreement appears to assume that the employer contribution to the Public Employee Retirement System will remain at the same level for the next budget period. However, it is virtually certain that the contribution will be required to be increased by about 5% during the 2013-15 biennium in order to keep PERS solvent. That reality suggests that projected payroll costs are understated by yet another 3%.

Finally, the agreement continues to fail to account for the cost of the more than 40 forms of paid leave available to state employees. General accounting standards legally require publicly traded private sector businesses to account for every dime of the cost of paid employee leave. The state of Oregon currently has no method for calculating or accounting for that expense that may amount to as much as 10 percent of total payroll costs.

By my calculations, we are faced with a locked-in collective bargained mandate that increases all funds payroll costs by at least 17 percent for the 2013-15 budget periods. That calculates to an increased cost to taxpayers of around $1.3 billion, just to continue to pay those who currently work for state government under the current labor contracts.

From my perspective, the recent labor negotiations have continued the same old tired shell game. Bargainers purposely understate the future costs of payroll increases by phasing in the expenses for the current biennium. They base projected savings on assumptions of future cost reductions that may not be based in reality. The full cost of the phased-in payroll increases and failed cost savings assumptions are then roll-up full bore into the next biennium. The taxpayer is left with the bill.

Both Governor Kitzhaber and former Governor Kulongoski have spoken eloquently on the critical need for a long term budgeting plan. They both envision ten year budget estimates that attempt to match state revenue projections with estimated future government costs. They both appear to understand that only two solutions are possible when state expenses greatly exceed state revenue. Those choices are to either raise taxes or reduce costs.

About 80% of Oregon’s available General Fund and Lottery income is used to compensate public employees. The only means of reducing that cost is to reduce the number of employees, when the cost of that public employee compensation is locked into an upward spiral by bargained labor contracts.

We all know that there will be another set of labor negotiations that will bargain for further increases in employee compensation for the 2013-15 budget periods. We should all pay very close attention. The solvency of Oregon government is at stake.

Please remember, if we do not stand up for rural Oregon… no one will.

Best Regards,

Doug