Moss Message: Champagne Bubbles

(The following is an edited version of the "Moss Message," commentary from state Rep. Chuck Moss, R-Birmingham. The "Moss Message" a semi-regular email column that he writes and sends out. Moss is the minority vice-chair on the Michigan House Appropriations committee - the highest ranking Republican member of the committee that approves the state budget each year. These are his observations regarding state spending on K-12 education.)

By State Rep. Chuck Moss, R-Birmingham

"More revenue." "Stable source of funding." "Increased investment." These are the phrases we're hearing these days, to justify higher taxes. So is there a genuine revenue need that would justify the extra tax burden? Advocates for government programs are passionate — K-12 public school advocates particularly. They say that their areas are investment, and more resources are needed. Are they? The first question should be: What are you doing with the money you already get? Advocates point all around, but the answer, particularly for K-12 public schools, is stunning. Their income is locked in labor costs.

Let's start with schools, and my district, the bulk of which is represented by two public school districts. The percentage of the general fund devoted to labor costs in one district is roughly 85 percent. Another is 90 percent. The schools say this is a normal and desirable proportion. Maybe so. Even if it is, that means that the non-labor part of the budget is 15 percent to 10 percent: buildings, maintenance, heat, utilities, paper, pencils, insurance — everything but employee compensation. OK, if balancing your budget is a problem, where do you look for cost reductions? The 15 percent to 10 percent, or the 85 percent to 90 percent?

So let's look at the lion's share of the budget. You can download the employee contracts from the Mackinac Center website. Most compensation packages have at least two components: salary and benefits. Benefits are generally regarded by employees as something separate, unquantified. They come from the benefits tree. Ask someone the present value of his benefits, what percentage of his compensation they represent, and how much that value went up this year, and he can't tell you. But according to a Mackinac Center study, by 2008, Michigan's civil service workers' benefits represented 58.15 percent of salary — on top of that salary! But let's be kind and assume it's only 30 percent.

Now, teacher contracts commonly have a "step" formula for increases built in. It's complex, but easy to unravel on a spreadsheet. If you follow the "steps" over and down, you can see that even leaving out extra pay for coaching, extra-curricular activities and various "economic adjustments," the over-life-of-contract raises can be substantial: as much as 20 percent for one salary step in one district. Even new hires are getting at least 1.5 percent increases per year. Analyzing the district with 90 percent of general funding locked up in labor costs, a teacher starting out in 2004-05 would have seen salary increase by 46 percent over six years! Remember, this doesn't include the value of increased value of benefit "raises." It doesn't include pensions either!

When K-12 public schools say they need "more revenue," ask them "for what?" When they say "for the children," roll your eyes and point to the facts. We know what they do with their current revenue: They bargain it away to the union and the employees. Any tax hikes we give them won't be "investment," but consumption — the money will go right in the schoolhouse door and out again into the employees' pockets — and they'll be hungry again in a couple of years. More revenue won't save them.

That same pattern applies to non-K-12 state workers. A review by the Mackinac Center shows pay raises for state workers alone have gone up 17 percent since 2002. It's actually 20 percent counting this year's 3 percent increase — at a time nongovernment workers in Michigan are taking compensation cuts when they're not actually losing their jobs. Again, this doesn't include the extra 50 percent for "benefit raises."

Folks, this is utterly unsustainable. There is no level of taxation we can levy that will support these rates of increase. Public employee compensation in Michigan has become a bubble. Just like housing values, tech stocks or Beanie Babies, government worker compensation has become a bubble that's no longer anchored to economic reality or ability to support. Extra taxes, for "investment" or "for the children," will only be futile attempts to keep the bubble from its inevitable burst. Schools and Lansing don't need "more revenue," they need to control and restructure their labor costs. General Motors couldn't afford a labor pay bubble like this, how can Lansing or your local school district?

So how do we do it? First off, don't raise taxes to keep inflating the bubble. Next, avoid the false choice of tax hikes versus layoffs for some employees to fund raises for the survivors. That's a death spiral, and the obvious answer is to restructure the compensation levels to keep everyone working... but that's another story.