A Greek Tragedy in U.S. Municipal Debt

In recent days, as the debt crisis in Greece and throughout the Euro zone has been splashed across world headlines, smoldering problems in public finance are coming to the fore of public attention.  In Europe and the United States, federal, city, and state governments have habitually bowed to the requests of their employees and public labor unions, offering salaries and benefit packages that they lack the tax dollars to support.

In the public sector environment of generous pay and benefits, some New York state policymakers are pursuing the difficult option of freezing state and local employees’ pay at current levels.

The Buffalo News reports:

In emergency legislation to keep the government running without a 2010 final budget in place, Paterson has not paid the 4 percent raises for state workers in the executive branch that were to have kicked in April 1. The extra pay is being delayed.

The governor also is threatening to start a once-a-week furlough program next week for about 100,000 state workers. The furlough plan would be put, under Paterson’s current thinking, in next week’s “extender” legislation to provide emergency funding for things like state worker paychecks, some road construction and unemployment and Medicaid payments. The bill requires a straight up-or-down vote — meaning if the Legislature rejected the bill because of the furlough, the government would run out of money and have to shut down.

The Empire Center, a conservative New York think tank, determined that canceling state workers’ raises for this year, as well as limiting municipal worker raises, would be legal if the state Legislature declares a fiscal emergency.

This dramatic action would help New York close its budget gap for the year, but larger municipal finance challenges, such as unfunded pension obligations, will continue to plague workers until state policymakers are willing to stand up to union demands that states cannot afford to meet.