The state’s budget crunch is now approaching endgame. Gov. Jennifer Granholm has succeeded in reaching an agreement with the Legislature over most of the spending cuts and revenue enhancements (relatively small, for which state taxpayers are breathing a sigh of relief) that will be needed to bring the state’s expenses and income in line.

What remains, however, is full of danger for the governor and officials of state employee unions.

As part of the budget deal Gov. Granholm committed herself to securing $230 million in concessions on wages and/or benefits from state employees. Naturally, union officials are less than enthusiastic. Both parties should bear in mind that whether or not they can settle this dilemma will have consequences that go far beyond this budget.

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For Granholm, failure is not an option. She has won kudos from across the state, including the approval of scholars at my institution, the Mackinac Center for Public Policy, for her handling of the budget so far. By cutting heavily into unneeded and counter-productive state spending, Granholm and the Legislature crafted a budget without any large-scale tax increases, allowing Michigan to become a bit more attractive to business owners compared to other states that did raise taxes in the midst of a recession.

But for this budget to work, Granholm must reduce the state’s payroll costs. If she is unable to do so she would lose all the political capital she has earned over the past year.

For state employees, the stakes are even higher. As many as 3,000 out of approximately 55,000 state employees could be laid off. State employees, especially those hired most recently, and consequently most likely to get the axe, cannot find the comments of their union leaders very reassuring. “No matter what meeting we go to around the state, workers say no concessions, let them make layoffs if they have to.” says Mary Ettinger of the UAW, which represents state clerical workers, welfare case workers, and parole officers.

There is a certain amount of bluster and bluff in negotiations, and it is likely that the governor and the unions will develop a plan that will balance the state’s budget without layoffs, possibly through reducing work hours. We would suggest that the parties also explore removing or suspending outmoded and inefficient work rules, allowing state workers to be make better use of limited time and/or manpower.

State employee union officials should recognize there is something at stake here that is far larger than their membership or even their own personal credibility: the credibility of state government itself. If government is to be taken seriously as a problem-solver in 21st century Michigan, then it must show the ability to manage its own affairs, including the ability to deal with tight budgets.

If Gov. Granholm and the state employee unions are unable to develop a constructive solution to the budget crunch, government itself will get a black mark in Michigan, reducing the enthusiasm of Michigan citizens for government services in general, and lessening the demand for government employees.

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Paul Kersey is labor research associate for the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. He recently wrote on binding arbitration for government employees.