Friday, May 02, 2008

Challenge to the Unions, Part Two

In Part One, we reported on County Council Member and Management and Fiscal Policy Chairwoman Duchy Trachtenberg’s letter to public employee union MCGEO offering a choice between layoffs and COLA reductions. Today we examine whether those measures are justified by the county’s dire budget situation.

Concerned over the county’s long-run finances, Council Member Trachtenberg asked council staff for an estimate of the future obligations to the county imposed by its public employee union contracts. Two weeks later, the County Council’s merit staff director responded with a 129-page memo outlining those costs. Page 2 of the memo contained this statement:

Councilmember Trachtenberg has requested information on agency compensation costs over time. One measure of these costs is the cumulative fiscal impact of the current or pending three-year negotiated agreements with the six County and MCPS unions, starting with the base year. See the fiscal impact statements on pages 37-39 and 111-113. The cumulative fiscal impacts are $117.9 million for MCGEO [government employees], $45.4 million for the FOP [police], $37.2 million for the IAFF [fire fighters], $61.9 million for non-represented employees in County Government, and $577.7 million for MCPS.

The total of these amounts, $840.1 million, does not include higher ongoing costs for health benefits for active and retired employees, nor does it include the $1.2 billion cost of the proposed eight-year pre-funding schedule for future retiree health benefits.
Are these marginal costs really accurate? We looked up the supporting data on pages 37-39 and 111-113, which correspond to pages 53-55 and 127-129 in the pdf document. Following is our tabulation of all marginal costs reported.

The marginal costs for each of the employee categories amount to $134 million in FY08, $176 million in FY09, $225 million in FY10 and $21 million in FY11 for a total of $557 million over the four years. (The estimate is low for FY11 because only the fire fighters’ agreements cover that year.) This total is much lower than the $840 million reported on the second page of the staff report, even though that summary refers to the pages tabulated above. There is simply no data in those pages to justify the $840 million estimate.

Furthermore, marginal cost data for FY08 should not be construed as a future obligation faced by the county. FY08, the current fiscal year, expires on 6/30/08. Those costs have mostly been paid already.

Finally, the analysis includes marginal costs due to fire and rescue management and non-represented employees. Why should the unions be held responsible for additional spending on employees they do not represent?

Subtracting out costs for the almost-expired FY08, the fire and rescue management and the non-represented employees, the remaining future obligations faced by the county total $154 million in FY09, $193 million in FY10 and $20 million in FY11, or a combined $368 million. This is a far cry from the $840 million cited at the beginning of the staff report.

Are added salary costs of $150-200 million per year sustainable? The answer depends on the county’s economic performance and the county government’s revenue collections. According to revenue statistics released by the County Executive, revenues collected by the county are projected to rise by $109 million in the current fiscal year (between 7/1/07 and 6/30/08). That overall rise in receipts occurred despite the facts that a) county receipts from the real property transfer tax dropped from $107 million to $80 million (down 25%), b) receipts from the recordation tax dropped from $73 million to $53 million (down 27%) and c) the county may have entered a recession. The above means that even in a really bad year, the county’s revenues continued to rise.

The County Executive’s proposal projects a further rise in receipts in FY09 of $301 million, partially due to his property tax increase. This would be more than enough to pay the $154 million in extra costs associated with the union contracts. At least for next year, the county should be able to meet its labor obligations if it adopts a budget similar to the County Executive’s recommendation.

As for the future, the most volatile components of the county’s revenues are the two tied to real estate sales: the real property transfer tax and the recordation tax. According to the county’s Department of Finance, residential real estate sales volume averaged over $500 million per month from 2006 through the first eight months of 2007. Since then, residential real estate sales volume has averaged between $200 and $300 million per month. It is this collapse in residential real estate transactions that has caused many of the county’s current budget problems. All policymakers – both inside the government and inside the unions – should watch this figure in the Finance Department’s monthly economic updates. If it rises back up to $400 million per month or more, the county’s real property transfer and recordation taxes will begin to recover. If it falls further, tougher times are ahead.