5/1/09

You Can’t Run Government Like A Business, But You Shouldn’t Run A Business Like Government

It’s been said that you can’t run government like a business. On the other hand, you shouldn’t run a business like government. It’s occurred to me of late that this is a big part of the problem affecting the Detroit Big Three automakers as they stumble towards bankruptcy.

The Big Three have treated their employees, especially those belonging to the United Auto Workers, as if they were public employees of a state – and for discussion’s sake, let’s say the state of Rhode Island since Michigan and Rhode Island today share the dubious distinction of being the two states with the highest unemployment.

In fact, the UAW and Rhode Island public employees have a lot in common, and the most obvious comparison is that they’re both costing their respective employers far too much in benefit costs, as a direct result of “legacy” contracts and giveaways. If Detroit has run a “benevolent manufacturing state,” as Time Magazine put it in its recent cover story on the Big Three’s woes, Rhode Island has run a “benevolent public sector state.” So it should come as no surprise in the midst of an economic crisis that both are in deep financial distress.

Detroit for decades has provided its unionized employees and their families cost-free healthcare – for life. So has the state of RI. Only in the past few years have UAW members and their Little Rhody counterparts been forced to pay a share of ever-rising healthcare costs. GM is now in the process of transferring future responsibility for healthcare coverage to the UAW, which will inevitably have to restructure coverage and contribution levels if they are to have any chance of keeping the benefit alfloat.

What about retirement? Again, Detroit and Rhode Island are in the same sinking boat. Both still fund, as best they can (which has not been enough – and the same goes for future healthcare obligations), traditional “defined benefit” pensions. It’s no wonder both parties’ pension systems are going broke.

As for retirement perks, what could be better than what the Big Three and Rhode Island give away? Idled autoworkers can spend their days in company provided retraining centers and still collect most of their pay. Retiring state employees get paid for unused vacation and sick time, and they also receive, as we’ve just found out, incentive pay to ease them out the door. Why not pay a 75-year old former college president almost $60,000 in incentive pay, on top of unused vacation and sick time and a $100,000-plus annual pension? It’s only taxpayers’ money.

State retirees also receive back wages for pay cuts initiated during the DEPCO crisis over 15 years ago. Talk about a legacy cost. What the state might take away, it will give back with interest at retirement time!

In the coming months Detroit is going to have to go through a managed bankruptcy to continue in business, a proposition that the UAW will have to reconcile itself to by bringing its wages and benefits down to the level of Detroit’s foreign in-country competitors.

In a similar fashion, Rhode Island public employee unions are going to have to reconcile themselves to reduced benefit levels more in keeping with the private sector. That means paying more for healthcare coverage, working longer to receive full retirement benefits, and getting by like the rest of working America with defined contribution retirement earnings by way of diversified investment and savings portfolios.

There are many reasons why Detroit is in such bad shape today as there are more problems than just employee costs that are sinking Rhode Island. Both enjoyed good revenue years in the not so distant past but they failed, each in their own way, to adapt and make tough, timely changes as circumstances began to alter their respective landscapes.

When you compare the Detroit auto industry to Rhode Island it’s clear that the two are suffering from outdated, ultimately unsustainable operating models. Detroit has functioned, to its peril, too much like the benevolent government that is Rhode Island. Neither can afford their costs, and nothing less than transformative change will make them healthy and competitive again. Here in Rhode Island the Governor’s plan to erase the yawning deficit we face is at least a beginning.