As the economic recovery proceeds, evidence continues to mount that state and local governments can't expect to grow their way out of their fiscal problems.
Pension and health care costs are still outpacing revenues, crowding out funding for basic services and sending some cities into insolvency. Reform will be necessary, particularly for the blue states, where most of the recent instances of extreme fiscal distress have been found.
Fortunately, some blue states have gotten religion, and models for reform do exist. To moderate spending on health benefits, blue states should emulate the Massachusetts health care reform.
No, not that one. Though less well-known than the 2006 "Romneycare" law, Massachusetts passed another health care reform in 2011 that enabled municipalities to exempt co-pays and deductibles from collective bargaining.
This seemingly minor carve-out from the state's public labor law has yielded extraordinary savings. Highly controversial at the time, the reform required no small amount of political will to see it through. But two years later, Massachusetts has moved on and accepted reduced bargaining rights for labor as the new normal.
The 2008-2009 recession inflicted heavy pain on Massachusetts' finances, and much of that pain was passed on to local governments. The state made deep cuts to nonschool local aid, a major recurring revenue source for cities.
By 2011, state government had already raised taxes, as had many local governments. With stimulus funds set to run out, pressure intensified for state government to offset the cuts with reforms.
Local officials knew exactly what they wanted: "plan-design authority." Like virtually all employers nationwide, Massachusetts cities had been grappling for years with unsustainable medical inflation rates.
Municipal health care costs had more than doubled over the previous decade. But many other employers had at least been able to reduce premium growth by raising co-pays and deductibles.
Massachusetts law prohibited local governments from taking this step outside of contract negotiations, which meant, in effect, without making expensive concessions to unions on some other end.
But if state government were to grant them unilateral authority over health care plan design, local officials knew they could realize significant savings. Naturally, unions opposed plan-design authority.
Sixty percent of government workers in Massachusetts are union members, the third-highest concentration among all states. In 2012, President Obama won Massachusetts with 61 percent of the vote; Republicans hold only 32 of 160 seats in the state House of Representatives and four of 40 seats in the state Senate. This is a deep blue state where labor is accustomed to getting its way.
But the unions lost this time, to a coalition composed of business groups, the policy community, and, most importantly, local government officials. As mayors and city managers spoke emphatically about the layoffs and service cuts caused by rocketing premium costs, state legislators found their demands difficult to ignore.
With the new authority over health care plan design, local governments managed to lower health care costs by $180 million in the law's first year of implementation.
Employees will also benefit, not only because lower health care costs mean fewer layoffs, but, since most employees also contribute something to their premiums, they will save money from reduced premium growth.
There are four lessons here. First, when it comes to collective bargaining changes, you get through it. Pick a battle you can win, hold the line, and when union predictions about catastrophe don't materialize, the reform will hold.
Second, collective bargaining reform need not be an all-or-nothing proposition. Minor modifications to labor laws can produce major savings.
Third, if Massachusetts can enhance local management's leverage over labor, there's no good reason why other blue states cannot do the same.
Fourth, local government officials can be extremely persuasive advocates for fiscal reform.
When sufficiently organized, focused and vocal about their needs, they can provide a formidable counterweight to unions' political influence.