Many cities across the United States are experiencing structural budget deficits. However, in part due to salary and benefit promises to public-employee unions, there is little capacity to control spending. Local politicians have few electoral incentives to push back against union bargaining demands to address these rising costs.
This article is part of a series examining the financial conditions of local governments in the United States and the forces that shape them. We will publish a new addition to the series every Monday for the next few weeks.
Observers of American politics often lament the growing budget deficits of the federal government and the gridlock that characterizes the United States Congress, but fewer discuss the similar challenges that have taken hold in municipal governments across the country. The drivers of the problems at the local level are different, but the upshot is largely the same: governments have reduced capacity and discretion, making it harder for them to address the public policy challenges they face.
Pressures on the revenue side of cities’ ledgers are longstanding and well known. Local governments need to attract and retain tax-paying individuals and businesses, which generates incentives to keep taxes low. State governments dictate what kinds of taxes and fees are usable by their local governments, and the tax revolts of the late 1970s imposed numerous tax and expenditure limits (TELs) across the country. One motivating logic for the TELs was that they would force fiscal discipline on state and local governments and incentivize good governance. But today, the real question is how much discretion and authority municipal officials even have to govern. In the modern political environment, local governments also operate under powerful political and institutional constraints on the spending side: most of them have a highly unionized workforce, make important budgetary policy through collective bargaining, and are devoting larger and larger shares of their expenditures to their employees’ retirement benefits.
For starters, the formal adoption of collective bargaining as a policymaking channel during the 1960s, 1970s, and early 1980s represented a tectonic shift in local governance. At that time, most states passed laws requiring their governments to engage in collective bargaining with their employees over the terms and conditions of employment should those employees elect to form unions. In states with such laws, most eligible employee groups did form unions, and collective bargaining has been the main forum for determining city employee salaries, fringe benefits, and working conditions ever since. Most cities today have bargaining units for police officers, firefighters, and other groups of city employees, and city officials must negotiate agreements with their union representatives every two to three years. The contracts typically establish salary schedules and provisions for bonus pay, health insurance, and rules governing how employees carry out their work, and the two sides must reach agreement. In case of an impasse, some employee unions have the right to strike, whereas for others, law sets out other processes to help the parties move toward agreement.
The provisions in these collective bargaining contracts are personnel policies, but they are also public policies—and important ones that have significant effects on city budgets. Compensating police officers, firefighters, public works employees, and other city workers makes up over half of a typical city’s total spending. In some cities, like Richmond, California, as much as three quarters of city expenditures go toward city employee salaries, wages, and benefits. That these spending categories are largely decided through collective bargaining means that some of the most important spending decisions of a city government happen at the bargaining table. City policymakers have to reach agreement with public-sector unions on these matters, and it is only natural that union leaders—who are elected to represent their members’ interests—would use these opportunities to push for higher compensation spending.
In states where public-sector collective bargaining is required, which is most states (with coverage varying by occupation), this is an important and underappreciated way in which public-sector unions can influence city spending. But public-sector unions work to influence state and local politics in many ways beyond collective bargaining. In most states, the local government workforce is very well organized. As of 2023, roughly 38.4% of all local government employees in the United States were members of unions—a much higher share than the 6% unionization rate in the private sector. Moreover, that national average masks considerable variation across states: it includes South Carolina, where only 5.7% of public-sector employees are union members, as well as states like Connecticut and New York, where 67% and 63.7% of public-sector workers are in unions, respectively.
These organized groups get involved in city politics in many ways in addition to collective bargaining. In research I did for my recent book, Local Interests, I surveyed elected officials and candidates in hundreds of municipal governments across the U.S., asking them to rate the political activity of various interest groups in their cities. At the very top of the list, alongside local chambers of commerce and real estate developers, were firefighters’ unions and police unions. In city elections, police and firefighters’ unions regularly endorse candidates, make campaign contributions, and serve as an important source of publicity and campaign support.
Other groups, like local businesses and chambers of commerce, can also engage in city politics in these ways, of course, but most of the time, they are not working in direct opposition to city employee groups. On matters of land use and development, for example, real estate developers and local chambers are engaged, but when it comes to the police budget, the most attentive group is usually the police union. In city elections, in fact, labor unions and business interests often back the same candidates. City politics usually is not an environment in which public-sector unions face regular, ongoing pushback from opposing political groups.
This has implications for who becomes a city elected official in the first place and to whom they are responsive in making decisions about city spending. Many city officials were supported by city employee unions in their elections. Even if they were not, advocating for city policies that run against the interests of city employees could mean a union-backed challenger in the next election. This means that many of the city officials who sit down to bargain with union representatives over a large share of the budget—management in this case—are inclined to be favorable toward the unions they are negotiating with.
Some studies have found that the presence of unions and collective bargaining in cities leads to greater spending on the salaries of city employees like police and firefighters. In a study Terry Moe and I did, moreover, we found that the spending differences between cities with and without collective bargaining for police and firefighters were even greater for fringe benefits like health insurance. One way to interpret this finding is that in the past, when city officials found it difficult to meet public-employee unions’ demands for salaries, they managed to reach agreement by offering more generous fringe benefits like health insurance. And once those benefits are in place, because of the politics, they are extremely difficult to change.
Adding to this, most cities are now spending more and more each year on retirement costs—yet another budget item over which city officials have little control. Almost all full-time city employees are eligible for defined-benefit pensions, and for reasons that are complex and highly political, most public-employee pension funds are underfunded. In recent years, to address that underfunding, many plans have improved their funding practices, which is a positive development but also one that demands higher contributions from participating governments. In a study I did of the pension expenditures of over 400 U.S. cities and counties from 2005 to 2016, I found that 88% of those local governments saw their pension contributions increase in real terms over that period, sometimes dramatically. In the median local government in the sample for that study, for instance, inflation-adjusted pension contributions increased by 56% from 2005 to 2016, but in 26% of the cities and counties, pension spending more than doubled during this period. In most of the local governments, moreover, pension expenditures were a larger share of general revenue in 2016 than in 2005.
When it comes to making decisions on the city budget, therefore, a large swath of city spending has already been spoken for before city officials can even weigh in. Collective bargaining contracts made in the year prior carry forward and are legally binding. Even if it is a year to renegotiate a contract, employee unions typically go into those negotiations with employee compensation a top priority, and city officials can hardly just decide to reduce spending on employee compensation. On top of that, in most cities, spending on pension contributions is now absorbing a larger share of city general revenue each year. While city governments have long been constrained in their ability to raise revenue, the environment in many cities today is one in which elected officials—those elected to govern—also have limited ability or incentive to control spending. It isn’t clear what is going to give.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
