Throwing Money at the Chicago Public Schools

Chicago public school teachers are on strike.  Issues include negotiations over possible pay increases, health care benefits, and job security over the next four years.  The negotiations in Chicago are important nationally because tough bargaining will be necessary for cities and states to gain control of the cost of compensation, health care and retirement benefits of public employees.  The bargaining between public administration officials and taxpayers on one side of the table and union leaders and public servants on the other will be instrumental in determining future tax rates, public debt and the quality and quantity of public services.  Moreover, because of the increase in Federal government funding of local governments, taxpayers in swing states such as Iowa, Wisconsin, Ohio and Virginia should be mindful of how their tax dollars have been spent in Chicago.  The funding of public elementary and secondary schools has become a Federal issue. The Chicago public school system is an excellent example of how education finance has changed over the past decade.

The Chicago public schools spent $12,193 per student in 2011.  This is a bit higher than the average for the state of Illinois and for the U.S. as a whole but is far less than the average in other large cities such as New York and Washington, DC.  In a series of tweets on Monday Josh Barro of Bloomberg View identified several reasons why teacher salaries are about the same in New York and Chicago but Chicago has lower expenditure per student: (1) class sizes are larger in Chicago, (2) a smaller fraction of students in Chicago are special needs students, (3) non-wage benefits are less expensive (and possibly less generous) in Chicago, and (4) the pension system for Chicago public school teachers is nut funded as well as the New York teacher pension system.

Federal funding of big city school districts is on the rise.  Nationwide about 12.5% of public school finances are provided by Federal aid.  Put differently for each $1 of local property taxes spent on schools the Federal government contributes 44 cents.  The Chicago public schools rely much more on Federal aid than the average district. About 23.3% of the finances of the Chicago schools are provided by Federal aid.  For each $1 in local property taxes in Chicago that are spent on schools, the Federal government contributes 59 cents.  These figures and the ones that follow are from Chicago public school budget documents.

The fact that the performance and efficiency of the Chicago public schools is now a Federal concern is a relatively recent phenomenon.  The following figure shows that, adjusting for inflation, Federal aid to the Chicago public schools increased by over 85% per student between 2002 and 2011.

Overall spending per student, after adjusting for inflation, has increased by 26.5% since 2002.  More than half of this additional funding has been paid for with Federal aid.  Moreover even though spending per student and Federal aid has fallen very slightly from 2009 to 2011 (adjusted for inflation) overall spending and Federal aid are much higher than just five years ago.

Where did the money go?  Enrollment in Chicago schools fell by 8% since 2002 so there is less reason to build new schools in Chicago than in cities with rapidly growing populations of school-age children.  Class sizes have not changed much in Chicago since 2002 despite the large increases in real spending per student.  The average class size increased from 22.6 to 23.2 for elementary students and fell from 20 to 19.8 in secondary schools.Everyone interested in the future fiscal health of our country should follow the Chicago negotiations between the teachers’ union and Mayor Emanuel.  Taxpayers throughout the country help finance schools in Chicago, New York and other large cities.  The administrators and teachers’ unions need to be responsive to their constituents, who now include taxpayers from across the country.  The Federal government provides more than $1.1 billion in aid to the Chicago schools per year.  This is not a large sum when one considers that the Federal government spends $1.1 billion every two and a half hours.  Nonetheless, quite the late great Illinois Senator Everett Dirksen “A billion here, a billion there, and pretty soon you’re talking real money.”

Fiscal Restraint and Casimir Pulaski Day

There has been considerable discussion this election year about the economic consequences of fiscal restraint.  Some economists believe that the economic recovery has been hampered by government cutbacks in particular spending programs.  A recent article in the Wall Street Journal noted that as state and local governments “get a handle on their finances” its “good news for tomorrow’s economy” but “straining today’s recovery.”

Downsizing institutions, public or private, is costly because it takes time for resources to be reallocated to other sectors of the economy.  However, wasteful government spending diverts resources from other more valuable uses and does not stimulate the economy.  There is no sensible economic argument, even in a weak economy, for delaying cuts in duplicative, ineffective or wasteful government programs.

President Obama’s jobs bill includes $35 billion of Federal aid for state and local governments to be used for teachers, police and firefighters.  Voters seem more likely to support this policy because they see the tangible benefits from this focused spending.  However, the President’s  support will dwindle if the pay and benefits of government workers seem excessive for the typical voter.  For example, a recent story in the Chicago Sun Times indicated that the average pay for a unionized Chicago firefighter is about $104,000 per year while the average full-time worker in Chicago earns $49,000 per year (according to the Bureau of Labor Statistics).

Chicago firefighters receive costly collectively bargained perks and retirement and health care benefits.  For example, firefighters in Chicago are awarded thirteen paid holidays and receive double time if they work on any holiday including Flag Day, both Lincoln’s and Washington’s birthdays, and Casimir Pulaski Day (March 4).  Democratic mayor Rahm Emmanuel is currently negotiating for limits on non-wage benefits in a new contract with the firefighters’ union (whose current five-year agreement ends in a few days).  Emmanuel is at the bargaining table with the same union leaders who helped elect him.  He knows that support for President Obama’s $35 billion spending package for teachers, police and firefighters will evaporate if voters believe that this money is not being spent wisely.

There are a number of areas where there is some bi-partisan support for government spending reductions.  The GAO recently released a report detailing $100 billion in possible savings by eliminating duplicative programs.  Senators Tom Coburn (R-OK) and Mark Udall (D-Co) and Representatives from both parties introduced legislation to eliminate duplicative government programs.  These cuts in spending will help the economy, even in the short run, and free up resources for more valuable projects.

Even wasteful government spending is difficult to eliminate because of vested interest in the status quo and the political power of government unions and contractors.  Al Gore, Jr. tried to reinvent government and Bill Clinton said the era of big government is over.  But, Ronald Reagan knew how difficult it is to achieve fiscal restraint.  He said: “No government ever voluntarily reduces itself in size.  Government programs, once launched, never disappear.  Actually, a government bureau is the nearest thing to eternal life we’ll ever see on this earth!”

Dyed-in-the-wool Keynesians believe all government spending stimulates the economy, even a holiday honoring Casimir Pulaski or an expensive junket to Las Vegas for GSA employees.  Keynesian economists who advocate government spending for its own sake are their own worst enemies.  Taxpayers will lose confidence in government solutions to economic problems if fiscal restraint is dismissed even as journalists report on government spending excesses.

Public Sector Unions and Lessons from the Elections in Wisconsin, San Diego and San Jose

Voters in Wisconsin decided to retain Scott Walker as their governor.  Last year Walker’s job security was in doubt because he dared to take on public sector unions.  In the end Walker was rehired by voters perhaps because he signed legislation that reduced the size of the state budget deficit and limited the collective bargaining rights of government workers in Wisconsin.  In San Diego voters scrapped the city’s defined benefit pension plan for city workers and replaced it with a defined contribution (similar to a 401k) plan for most new hires.  San Diegans were apparently frustrated by city government officials who repeatedly increased pension benefits for workers without finding a way to pay for higher compensation.  Pension reform also passed by a wide margin in San Jose, California, where the cost of pensions for city workers have also soared.  In San Jose government workers will either have to contribute more for their generous defined benefit pension plan or can opt in to a less generous plan.

Wisconsin, San Diego and San Jose are not generally considered places that are hostile to unions, but the message from voters to politicians seems clear.  Voters are uncomfortable with politicians receiving political and financial support from public sector unions and then negotiating for union contracts with those same unions.  Voters perceive that they are paying too much for the total compensation (including pension and health care benefits) of government workers.  The data indicate that the voters are probably correct.

It is difficult to directly compare the wages and salaries of government and private sector workers.  However, it makes economic (and common) sense that workers are much less likely to quit a job for which they are relatively overpaid.  The following chart compares the quit rates for state and federal government employees to private sector workers in the information, business services, education, health care and financial services sectors.  This comparison is more appropriate than comparing government employees to private sector workers, overall, because government employees are primarily white-collar workers whose next best private sector opportunities would be in these sectors.  The chart clearly shows that quit rates in the public sector are only about one-third the rate of comparable workers in the private sector. 

Government workers don’t quit their jobs because their compensation, including pension and health benefits, is higher than they would receive for comparable work in the private sector.  Protests from public sector unions are to be expected because no workers, even those who are relatively overpaid, want to make concessions to management.  We will have an indication that the pension and collective bargaining reforms have gone too far if quit rates in government jobs increase above those in comparable private sector jobs, and government agencies receive fewer applications per job opening than their counterparts in the private sector.  Until that happens voters can be assured that public sector wages and benefits are high enough to attract and retain workers.

Public sector unions, which were virtually nonexistent 50 years ago, are the last stronghold of the American labor movement.  Private sector unionization rates have dropped well below 10% and members of public sector unions outnumber private sector union members.  The elections yesterday dealt quite a blow to organized labor which was unable to sway public opinion.  Unions desperately wanted to oust the Wisconsin governor and members of the state Senate who neutered their ability to collectively bargain for compensation.  Expect more governors and state legislatures to follow Wisconsin’s lead, and other cities to follow San Diego and San Jose and reduce the compensation and benefits of state and local government employees.

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