Public pay, benefits set off new 'civil war'

Doron Jensen gets a little rattled whenever he hears public employees grousing about possible wage freezes, or that taxpayers might be forced to bailout government worker pensions.

When the economy tanked in 2008, Jensen's Supper Club in Eagan lost $500,000, leading to his wrenching decision to lay off workers and reduce contributions to employee health care.

Several recession-rocked states have taken similar steps: slicing government rosters, cutting salaries and imposing furloughs. Not Minnesota.

Now long-simmering tensions over public worker costs, coupled with renewed fears over their multibillion-dollar unfunded pension obligations, are colliding with the state's projected $6.2 billion deficit.

Suddenly, deeply held beliefs about public workers, the kind of benefits they deserve and the unions that represent them are being thrust into a searing new glare.

"In my world, in the real world, we had a huge downturn," Jensen said. "But here, government just keeps on keeping on."

Minnesota has long been a bastion of robust government payrolls and generous benefits. Powerful unions curried strong favor in the halls of power.

While the state government employee roster crept up in recent years, 157,000 Minnesotans lost their jobs. Others endured wage and benefit reductions, watched their 401(k)s take a body blow and their retirement date recede toward a fuzzy horizon.

"We certainly are approaching a crisis with public employee costs and benefits," said Adam Summers, a policy analyst with Reason Foundation, a conservative think tank. "The recent economic troubles only revealed what had been concealed by a period of exceptional growth, fueled by the housing and financial bubbles ... Many governments are still in a state of denial."

Republicans, who now lead the Legislature, say government wages and benefits must be brought into line with the private sector and that government's footprint must shrink -- including its workforce.

DFL Gov. Mark Dayton, whose candidacy was strongly backed by unions, has ardently defended state workers and the services they provide. He has not said whether workforce reductions will be part of the budget proposal he will unveil Tuesday.

Union leaders and workers are calling the clash "a new civil war." They accuse Republicans of painting them as fat cats -- the "haves" to the private-sector's "have-nots."

"There's no reason for us to demonize public employees and single them out as the group that ought to bear the brunt of the burden," said House Minority Leader Paul Thissen, DFL-Minneapolis. "The idea that you are going to be attacking middle-class Minnesotans who are doing a public service... makes no sense to me."

Minnesota is nowhere near defaulting on its obligations, but leaders in other states wrestling with pension and benefits burdens are taking action. In Wisconsin, new Gov. Scott Walker has proposed sweeping benefit cuts for public employees and taking away most of their ability to bargain. He's also threatening to use the National Guard to do their jobs if state workers revolt. His plan is expected to find support in the state's Legislature, where like in Minnesota, Republicans won control in the fall elections. In New Jersey, Republican Gov. Chris Christie last year skipped a $3 billion payment to the state's troubled pension fund to force changes to what he believes are too-rich benefits.

Salary-benefit tradeoff

For years, government work was seen as a tradeoff: slightly lower salaries in exchange for security, good benefits and a comfortable pension. Over time, other perks crept in.

At the University of Minnesota, employees attended school free until last year; they now pay 25 percent. Up until just a few years ago, Duluth city employees got free health care when they retired -- including public safety workers who could retire in their mid-40s with young families.

In 2008, just 48,000 companies in the U.S. offered pension programs -- down from 150,000 in 1988.

Instead of maintaining costly pensions and committing to a lifetime of defined benefits for retirees, companies contributed to mobile retirement accounts, such as 401(k)s.

The nation's workforce has also changed. By January 2010, for the first time, public employees made up the largest percentage of union workers. Several recent studies show that at least some public employees now make more than their private-sector counterparts, although that is not true across the board.

As the economy soured, resentments got new breath and the GOP grabbed hold.

Former Gov. Tim Pawlenty, a Republican with presidential aspirations, has taken to calling the rise of government unions "a silent coup."

Government workers say they are sick of being demonized at dinner parties and on the stump, where they are reviled as lazy and inferior. They also resent the criticism for hard-fought union contracts they say are tough, but fair.

Mike Buesing, 62, said the rancor has reached a crescendo. A skilled highway construction planner, Buesing has put in 38 years at the state Department of Transportation. He owns a modest townhouse in Shoreview with a mortgage and makes $54,000 annually. When he retires later this year, he'll take in about $3,000 monthly from his pension.

"I am not living high off the hog," Buesing said. "It's a struggle, paycheck to paycheck. People think I am making a lot more money than I am. When I tell them, they usually are surprised."

Union leaders note that employees like Buesing are on the high end. State retiree pensions average a modest $13,000 a year.

Eliot Seide, president of AFSCME Council 5, said that such pensions are a testament to the union belief that middle-class workers should be able to enjoy retirement "with dignity."

But in a badly battered economy, that level of comfort comes with big risks for taxpayers. The state faces a $14 billion unfunded liability in coming decades for the 644,000 state workers who are or will be eligible for pensions. That's about $3,200 for every person in Minnesota.

Union officials say the problem is less about increasing benefits and more about investments that sagged during the recession. The pension shortfall has become less breathtaking as those investments have rebounded. Pension analysts also note that the problem stretches over 30 years, allowing ample time for modifications.

But the problem is not just theoretical.

Moody's Investor Service, a premier credit-rating agency, issued a report this year that added pension obligations to its formula for determining a state's fiscal health.

Minnesota holds one of the best credit ratings in the nation, but adding in its unfunded pension liability drops it to the middle of the pack.

"There isn't a push to get rid of pensions; it's to lower dollars going in," said former State Auditor Pat Anderson, a Republican who joined the Minnesota Free Market Institute's Pension Reform Project.

Anderson and others say the pension system encourages risk-averse employees who never leave. The longer they stay, the more seniority they acquire and the sweeter their pension becomes. That, she said, leaves little room for more entrepreneurial types.

"If we want to attract good people to government, who aren't careerist, you need a system that works," she said.

Anderson, for all her criticism of the system, will receive money from two government programs when she retires: one from her time as mayor and city councilwoman in Eagan, plus additional benefits from her term as an elected state official.

Pawlenty, who has criticized public employees' "Cadillac" health care plans, requested a letter before he left office outlining his future state health care benefits. The former legislator and state employee can draw from two state retirement programs, including a defined benefit pension program, when he retires.

State workers note that their home values sunk like everyone else's and that they made financial sacrifices unnoticed in the din of the Capitol debate. Several said a strong sense of duty caused them to stick with government work.

"I am working hard to make ends meet, and I am working hard for something that I think puts a real service to the community," said Jean Diederich, a child support officer in Hennepin County. "We are like a safety net for the community. It's frustrating when we are treated like we have no value."

Diederich, 57, makes $53,000 a year. When she retires, her pension will bring in about $20,000 a year.

To save the county money last year, Diederich took time off without pay to prevent forced furloughs.

A few years ago, she considered a private sector job that would have paid more and offered more prestige.

"Every morning I have to look at myself in the mirror and say, 'Am I doing something worthy?' " Diederich said. "Money is not the end all to be all. It's job satisfaction; feeling like I have accomplished something."