Executive Summary

Nearly all of the City of New York’s employees are working without new contracts. The five-year agreement with the largest municipal employee group, District Council 37 (DC 37), expired on March 31; the latest to expire was with the United Federation of Teachers (UFT) on November 15. The outcome of the negotiations now underway is critically important to citizens of New York. At stake is not just whether government will be more expensive, but whether it will be better.

In recognition of the high stakes and important goals of collective bargaining, the Citizens Budget Commission (CBC) seeks to inform the citizenry about the issues and to suggest desirable features of new contracts. In August, the Commission released a report on negotiations with the UFT entitled, Using Collective Bargaining to Improve Public Education.

This report focuses on the rest of the municipal workforce. It provides background information on the negotiations and suggests measures to promote more efficient and more consumer-responsive services. This report is organized into three parts. The first provides background information on municipal collective bargaining and the outcomes of the last round of negotiations that began more than five years ago. The second presents recommendations for the current round of negotiations relating to both wages and fringe benefits. The final section considers the fiscal implications of following the Commission's recommendations.

Background

The first section of this report is intended to serve as a citizen’s primer on municipal collective bargaining. It explains the legal framework of negotiations, the patterns of past settlements, the specific outcomes of the last round of negotiations, and the fiscal and political context of the current round of negotiations.

Rudolph W. Giuliani was sworn in as Mayor in January of 1994, a time when the City faced significant budget gaps. In recognition of the financial difficulties, the Mayor called on the unions to agree to a “Transitional Productivity Efficiency and Labor Savings Initiative.” This initiative was intended to save $600 million in fiscal year 1996, $400 million in fiscal year 1997, and $200 million in fiscal year 1998. What the Mayor and the unions eventually agreed on did not meet these dollar targets, and did not meet any reasonable definition of a “productivity” initiative.

The largest component of the initiative was a three-year freeze in the premium the City pays for health insurance for its workers, yielding temporary savings of about $470 million over the three years. However, since 1998 there have been substantial rate increases to rebuild reserves. In effect, the rate freeze represented a loan to the City from its health insurance providers, hardly a productivity gain. A second piece of the plan was to lower the City’s contribution to employee pension plans by $150 million in fiscal year 1996 and $224 million in fiscal year 1997 by drawing down pension fund reserves created by the stock market’s strong performance. This saving required no change in any employee’s behavior on the job; ironically, the unusually high rates of return to capital on Wall Street were labeled "labor productivity" in the mayoral initiative. The third element in the plan was a delay of payment from the City to several union welfare funds. In fiscal year 1996, $81 million of these payments were deferred until fiscal year 2000. Again, a loan was labeled as labor productivity.

In 1995 the Mayor began to negotiate new labor contracts to replace those expiring that year. He settled with District Council 37 in November of 1995 and the contract was ratified in early 1996. The settlement set the basic pattern for the rest of the unions—a two-year wage freeze followed by annual increases in the next three years. Despite the much-publicized “double zeros,” wage increases basically kept pace with inflation over the entire contract. Although real wages fell in the first two years, low inflation and increases of 3 to 6 percent annually for the next three years offset the early freeze.

All other parts of employee compensation—health insurance, pension benefits, and welfare fund contributions—were enhanced during the five-year contracts as well. Health insurance costs increased 7.4 percent annually over the period, reflecting more workers covered and higher premiums. City contributions to union welfare funds increased about one-third over the period. In addition, pension benefits were enriched significantly.

Recommendations

Citizens should expect three outcomes from the current round of negotiations.

1. The first is greater efficiency in public services. Collective bargaining should make New York City more competitive by lowering the unit costs of public services.
2. Second, the negotiations should yield higher quality public services. New pay incentives and work rules should encourage better performance.
3. Third, the new contracts should improve the morale and economic status of municipal employees.

To support these important outcomes, the Citizens Budget Commission makes three recommendations relating to wage policy and three recommendations relating to fringe benefits.

Recommendations Related to Wage Policy

1. Set pay levels in response to labor market conditions, with shortage occupations receiving greater wage increases than those occupations where abundant applicants are available.  
2. Change work processes in ways that lower the unit cost of services.
3. Shift the emphasis in pay scales from longevity to performance by adding a merit pay component to wages.

Recommendations Related to Fringe Benefits

1. Modernize the health insurance program for municipal workers and retirees.
2. Streamline the administration of welfare fund benefits.
3. Restructure the pension system for newly employed workers to provide a defined contribution rather than a defined benefit.

Fiscal Implications

The Citizens Budget Commission’s recommendations include two measures that together with the labor reserve in the City’s Financial Plan would result in resources of $3.5 billion in fiscal year 2004. At the same time, the recommended base pay increases, added merit pay, and gainsharing arrangements would increase workers’ pay by nearly $2.1 billion, leaving a net gain to taxpayers of about $1.4 billion.

The largest fiscal impact comes from initiatives to improve productivity. Based on the Fire Department example, the expected gains in the uniformed services would be 4 percent annually, with a cumulative savings of about 16 percent by fiscal year 2004. For civilian workers, among whom overtime and other practices are less problematic, the gains are estimated at 2 percent annually. Together these savings would exceed $2.2 billion in fiscal year 2004.

The recommended restructuring of the employee health insurance program would yield savings of $781 million in fiscal year 2004. When the combined value of the two measures is added to the labor reserve created by the Mayor for merit pay increases ($504 million for nonpedagogical workers), the total available resources are $3.5 billion in fiscal year 2004.

The Commission's most expensive recommendation relates to the base pay increases for municipal workers. The recommended policy is to give raises equal to one-half the rate of inflation to workers in glut positions, raises equal to inflation to those in positions with recruitment difficulties that are not due to wage differentials, and adjustments averaging 19 percent plus inflation to workers in positions with shortages due to uncompetitive wages. The necessary expenditures would be $1.1 billion in fiscal year 2004.

The recommendation to share the one-third of the savings from productivity initiatives with the participating workers would require about $750 million in fiscal year 2004, and the recommendation to establish a merit pay program rewarding the top one-quarter of all workers with bonuses averaging 10 percent of base pay would cost about $256 million. Together these measures would raise the pay of municipal workers by over $2.1 billion annually.

The recommendation to change the pension system to a defined contribution plan is expected to be budget neutral. The goal is not to save money; it is to protect against unexpected and unjustified increases in costs while avoiding counter-cyclical demands on the City’s revenues. Similarly the recommendation to streamline welfare fund administration is intended to increase workers’ benefits rather than produce savings to the City.

In sum, the CBC’s recommendations would promote the goals that citizens should seek from the current round of collective bargaining: The cost of services would be reduced with net savings of $1.4 billion available for fiscally prudent purposes. The quality of services would be enhanced due to the ability to recruit needed workers with suitable competencies and due to financial incentives for better performance by work groups within agencies. And public servants would be better paid through a combination of base pay increases and incentives in the form of gainsharing payments and merit pay.