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California’s Bankrupt Cities: Look East to Wisconsin

In the 11 months since Wisconsin Governor Scott Walker abolished collective bargaining rights for government workers, Wisconsin cities, towns, and school districts have saved millions of dollars. There’s an important lesson here for California as its cities start to go bankrupt. In Wisconsin, writes Steven Malanga for the LA Times, Walker’s changes immediately took hold.

The state’s teachers union, Wisconsinites learned, had used its power to collectively bargain for healthcare benefits to demand that local school districts provide coverage through a nonprofit insurer affiliated with the union. Once the state ended bargaining on healthcare, school boards began competitively bidding out their health insurance.

By the opening of the new school year in September, just two months after the budget bill went into effect, 23 districts had rebid their contracts, saving $16 million, or an average of $211 per student. The MacIver Institute, a Madison-based think tank, estimated that if all the state’s districts were able to negotiate similar deals once their contracts with the union-affiliated insurer expire, schools could save $186 million…

In mid-August 2011, barely a month after the changes went into effect, the Milwaukee Journal Sentinel reported that the city would save as much as $36 million in its next budget from “healthcare benefit changes it didn’t have to negotiate with unions” as a result of the new state legislation.

Malanga contrasts this with the experience of some troubled California cities:

Californians should understand those fiscal pressures. Average annual pay for a local government employee in the state rose by 60%, to $61,185 (excluding benefits), between 1999 and 2008, according to the Little Hoover Commission on California State Government Organization and Economy. That’s about 70% more than the increase in private sector wages in the state over the same period. Average pay for cops and firefighters climbed 69%, to $89,056, again excluding benefits, in the same period.

Benefit costs have soared even more than wages. The annual cost of funding pensions in California’s 20 largest municipalities has grown from $1.3 billion in 1999 to $5.1 billion last year, according to a study by Stanford University professor Joe Nation. That’s an annual growth rate of better than 11%.

Faced with such increases, municipalities in California haven’t had nearly the flexibility to mend their budgets that officials in Wisconsin have.

In San Jose, where the average cost of employing a city worker, including benefits, has soared to an extraordinary $142,000 annually, Mayor Chuck Reed had to fight long and hard for a ballot measure to reduce pension costs that was passed by voters in June. In the three years before the vote, the city had to lay off about 2,000 employees and cut back on parks, libraries and other services.

In Stockton, which declared bankruptcy in June, for every dollar the city spent on salaries, it spent another dollar on employee benefits. Facing unsustainable employee costs and an intransigent police union that was demanding the city pay retired officers about $300,000 for unused sick and vacation time, Stockton cut a quarter of its public safety forces and still couldn’t meet its obligations.

In the end, math matters and as a general rule, the sooner you make your peace with arithmetic, the less it’s going to hurt. Moderate and mild reforms work pretty well if the reform process starts early enough; wait long enough, though, and the steps needed to get the finances straight become savage and painful. Ask the Greeks. Or ask the citizens — and the municipal employees — of California’s bankrupt cities.

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  • Kris

    I am baffled by the Wisconsin situation. How can a for-profit health insurer possibly be cheaper than a nonprofit one? Especially if the insurer is not subject to special regulation but is chosen based on the free market? A puzzle indeed.


  • thibaud

    Er, Kris? Did you miss this part (emphasis added)?

    “a nonprofit insurer _affiliated with the union_.”

    The most basic principle of good governance is that public transactions occur only with arms-length entities, Kris.

    Maybe there are scandals like this in Sweden or other nations’ healthcare systems re. their contracts with non-profit insurers, but I’m not aware of any.

    Again, the issue here is not “socialism” vs “capitalism” but governance.

    Wisconsin like most US states, red blue or whatever, is atrociously governed.

    The key is not to give these cesspools more freedom in the form of more block grants, ie more authority to make a deeper mess of things than they already have, but to clean up our politics and move toward a simpler, cleaner, less opaque system. Universal health insurance, supplemented by reforms like the ACA’s health insurance exchanges, would move us a long way toward that goal.

  • past master of the obvious

    Kris, it’s called competition. The union affiliated health provider had no competition the for profit provider does. That’s is how the world should work. When there is competition prices can and will be lower. By being forced, by the unions, to deal with a sole provider they couldn’t negotiate better deals.

  • OathofFealty

    AHHH. Profit, the curse word of progressives. Think about it? A “non profit” In the last 10 or 12 years the unions have given the Democrat party, over $4 billion. That money had to come from somewhere.

  • PTL

    Non-profits and other NGO groups get billions of dollars from Federal, State and Local governments and then use the money to lobby those same entities for more money. All the
    while very few are held accountable for their funding. Check out the salaries and benefits of the people who run these groups. It’s non-profit for us. Not for them.

  • RS

    Union plans skimming cash?

    Unheard of.

    As Jimmy Hoffa said before his extended vacation: “If youse can’t trust da union, who can youse trust?”

  • Maxwell Jump

    I think Kris was being sarcastic, notice the sarcasm tag; [/sarc].

  • Carl Hardwick

    >Maxwell Jump says:
    >July 23, 2012 at 10:57 am

    >I think Kris was being sarcastic, notice the sarcasm tag; [/sarc].

    Interestingly, Kris has only himself to blame. He made an html error, the [/sarc] should have had a matching [sarc] at the beginning.

    So, like a browser, everyone reading his post misinterpreted it.

    I suppose this post should be surrounded by [recursive] … [/recursive] markers as well.

  • leon0112

    I am sure the Medicare model is far more cost effective and has far less fraud. California’s cities should study Medicare to cut costs. /sarc

  • LiberalsRstupid

    It’s always “Capitalism” vs everything else. When youre the Champ you take on all comers. Capitalism is the ONLY system that has ever worked. Only a [please refrain from insulting others] Progressive thinks otherwise.

    Millions of people making transactions in their best interest or [derogatory term for Nancy Pelosi] doing what is in HER best interest, which will likely succeed in the long term?

  • Rich K

    Dont you read your own words thibaud.Why on earth would exchanges be needed for Universal Health coverage as that implies coverage without required contribution or participation on the revenue side, unless we have out concepts of universal mixed up.
    Btw folks,non profit is not NO profit, it just signified a lack of stock or investment vehicles avaliable for that entity.All monies go to output and staff at whatever rates of compensation its board decides is appropriate.Many even stress the need to make a profit but that does not mean they are a zero sum entity.But all you guys knew that anyway,right?

  • Ed

    And no layoffs and no service disruptions in Wisconsin.

    California in contrast will go down ugly under the gross misrule of the Sacramento Supreme Soviet.

  • koblog

    “Er, thibaud? Did you miss this part (/sarc)?”

    Stepped in it. Again.

    And hiding behind the word “governance” as an excuse for failed central planning, pathetic.

  • thibaud

    Rich – agreed, the point about exchanges was a slip on my part (late night). That’s a feature of the half-reform that is ACA, not the really intelligent system that is universal health coverage supplemented by optional private insurance.

    For the curious, there’s a variety of supplemental private insurance models – for-profit, nonprofit, some of each – available that all deliver vastly more efficient healthcare with overall outcomes that are as good or better than what our Rube Goldberg non-system delivers.

    But all of those systems require a much tighter regulation of the insurance sector than our conservatives are willing to contemplate, as well as the backstop of government-provided insurance for all.

    Again, healthcare is not a normal market. You have next to no transparency in pricing, a separation of payer from provider, and most importantly, zero price-elasticity of demand from those who are sick combined with astronomical price-elasticity of demand from those who aren’t sick. Allowing private insurers to exclude the former group destroys the whole model.

    While competition, where and when you can enable it, is nice, the hard reality is that there’s no profit generated by overall healthcare system.

    This applies to health insurance as well. Unlike every other form of insurance, where a tiny group of outliers will incur astronomical expenses, we will ALL consume huge amounts of healthcare in the course of our lives, with a median annual figure in today’s dollars of about $250,000, and most people falling between $100,000 and $1 million.

    All of these absurd contortions to try to make healthcare into something it’s not – ie a normal market with elastic demand curves everywhere – merely cause us to waste more and more money and deliver a wide range of casual cruelties to families and individuals who, through no fault of their own, face ruin for the simple reason that they fall ill.

    The obvious and logical solution is to expand the risk pool to the maximum via universal health insurance and also to heavily regulate the activities of private insurers.

  • thibaud

    Interestingly, the for-profit US insurers’ business model may well be starting to collapse as US hospitals and doctors move toward the so-called “full clinical integration” model whereby hospitals, doctors and insurers combine in one entity to drive costs down and deliver better care. Hospitals are beginning to create their own affiliates, and doctors are joining them in large numbers.

    Of course, once you have an integrated entity, you don’t really need private insurers any more, since they add no value beyond what the hospital/doctors’ insurance affiliates provide. We’re already moving in this direction, and fast.

    Which raises the question as to why anyone would do so many cartwheels to preserve the dinosaur that is the extraordinarily wasteful, useless, casually-cruel private insurance system. Occam would say that the insurance mafia has captured the regulatory apparatus.

  • teapartydoc

    What koblog said. Plus: any type of system can be run atrociously. Cuba has universal health care and for Cubans behind the Potemkin facade put up by the Thibaudians there it is atrocious. It can’t be used successfully here because of our porous borders and a culture of non-work brought about by our beloved Blue Model.

  • Bob

    Its interesting how non-profits and NGOs have some of the nicest offices, richest benefits,,and highest paid executives.

  • thibaud

    #17 – yep. You’re right. Those greedy non-profits are nothing like that noble UnitedHealth Group (UHC) and its brilliant CEO, William McGuire.

    He’s the one who scammed his way to hundreds of millions in false gains from backdated stock options, and then secured $1.1 billion – yes, BILLION – golden parachute from his corrupt and compliant board (see comments re. regulatory capture, above – the board included GOP ex-Gv. of NJ Tom Kean and ex-HHS Sec’y Donna Shalala).

    McGuire’s annual compensation totaled as much as one out of every $700 paid in premiums to UHC.

    Excerpt – it’s an amazingly appalling story, worth reading in full:

    “Backdating of hundreds of millions of dollars’ worth of stock options by UHC management:

    “On October 15, 2006, UnitedHealth CEO William W. McGuire was forced to resign, and relinquish hundreds of millions of dollars in stock options. On December 6, 2007, the SEC announced a settlement under which McGuire will repay $468 million, as a partial settlement of the backdating prosecution. Legal actions filed by the SEC against UnitedHealth Group itself are still pending.

    In February 2008, New York State Attorney General Andrew M. Cuomo announced an industry-wide investigation into a scheme by health insurers to defraud consumers by manipulating reasonable and customary rates. The announcement included a statement that Cuomo intended “to file suit against Ingenix, Inc., its parent UnitedHealth Group, and three additional subsidiaries.” Cuomo asserted that his investigation found that rates found in a database of health care charges maintained by Ingenix were lower than what he determined was the actual cost of certain medical expenses. Cuomo said this inappropriately allowed health insurance companies to deny a portion of provider claims, thereby pushing costs down to members.

    On January 13, 2009, UnitedHealth Group and Ingenix announced an agreement with the New York State attorney settling the probe into the independence of the health pricing database. Under the settlement, UnitedHealth Group and Ingenix would pay $50 million to finance a new, non-profit entity that would develop a new health care pricing database. Ingenix would discontinue its medical pricing databases when the new entity makes its product available. The company acknowledged the appearance of a conflict of interest, but admitted no wrongdoing.

    On January 15, 2009, UnitedHealth Group announced a $350 million settlement of three class action lawsuits filed in Federal court by the American Medical Association, UnitedHealth Group members, healthcare providers, and state medical societies for not paying out-of-network benefits. This settlement came two days after a similar settlement with Cuomo.

    McGuire’s exit compensation from UnitedHealth, expected to be around $1.1 billion, would be the largest golden parachute in the history of corporate America.[25]

    Estimates of McGuire’s 2005 compensation range from $59,625,444 to $124.8 million and the revenue of UnitedHealth Group was then $71 billion, [implying that] one of every $700 that was spent on UnitedHealth Group premiums went to pay McGuire.

    On December 6, 2007, the SEC announced a settlement under which McGuire was to repay $468 million, including a $7 million civil penalty, as a partial settlement of the backdating prosecution. He was also barred from serving as an officer or director of a public company for ten years.

    This was the first time in which the little-used “clawback” provision under the Sarbanes-Oxley Act was used against an individual by the SEC. The SEC continued its investigations even after it in 2008 settled legal actions against both UnitedHealth Group itself and its former general counsel.

    Through 2010 and into 2011, UnitedHealth senior executives have been meeting monthly with executives of leading health insurers to limit the effect of the health care reform law.

  • thibaud

    [Please refrain from disparaging other commenters.]

    Kris’s sarcasm was directed at those like me who point out the ridiculousness of her belief that for-profit insurers must be more efficient than non-profit and government insurers.

    Just to be crystal clear, she and I are on different sides of this issue. If she’s being sarcastic, then she’s doing so at her opponents’ expense. Got it?

    But her darts are aimed at the wrong target. Again, in reality, the US for-profit health insurance system is extraordinarily wasteful, bureaucratic, needlessly complex, and predatory.

    No one’s claiming that there isn’t waste and red tape in other systems, but such waste does not even begin to compare to our for-profit system that spends vastly higher amounts per capita on needless administrative waste, with worse results, than systems based on universal healthcare.

  • Jim.

    My grandfather was the VP of engineering for an electronics firm in Silicon Valley (back before anyone had heard of a personal computer) and produced high-tech electronics components for the government. He would regularly and loudly complain about the difficulty of making a company budget work, when your sole customer (DoD, personified by MacNamara) could pay you what it pleased, and throw you in prison if you decided to pursue other customers. (Sounds like HilaryCare, no?)

    That was the 70’s. What has happened since is “regulatory capture”, and has resulted in a DoD that is famous for massive lobbying, log-rolling, and back-scratching. That was a direct consequence of the reality that they had only one customer. If you have to have their cooperation to make ends meet, you got their cooperation by hook or crook.

    What in the world gives anyone any confidence that a government suffering from comprehensive and practically institutionalized regulatory capture can successfully pull off cost reduction by becoming a monopsony in heath care, motivating companies in the strongest possible way to attempt regulatory capture at all costs??

    Solve the regulatory capture problem FIRST, before surrendering any more of our economy to an organization so rife with it.

    Rescind Dodd-Frank and break up the banks. Wring inefficiencies out of military procurement, perhaps by informing generals and admirals that they’re going to have to do the same job with less resources, so they’d better start making the pennies count. End the revolving door between government and companies like Goldman Sachs. Stop regulating everything in sight, to make lobbying far less cost effective — at the very least, cut it to the point that it’s no longer a matter of fiscal survival for most companies.

    Then, and ONLY then, (and perhaps not even then!) would our government be ready to take on Universal Health Care.

    Otherwise, it’s just going to be another regulatory capture disaster (and comprehensive fiscal disaster) waiting to happen.

  • thibaud

    JIm – glad we agree about regulatory capture, but your DoD analogy isn’t apt. The level of complexity shouldered by the monopsonist in this case – setting reimbursement rates, mailing checks – is trivial compared to manufacturing or finance.

    And all the evidence we have from other countries is that the more _public_ that rate-setting process is, the less graft, waste and unfairness (cf McGuire’s UnitedHealth, among many others) result.

    If it were otherwise, then we would not be seeing hospitals and doctors moving rapidly, as they are now, to create affiliates that can offer their own insurance.

    Again, in our current system, the insurers do not add value. They subtract value. The goal should be to make the role of the insurer, hence the amount of money wasted on this aspect of the system, as small as possible relative to delivery of care, biotech/pharma R&D, and the best health outcomes for the nation.

  • Victor Erimita

    Sure, “California’s cities” might look to Wisconsin for clues of how to extract themselves from their financial Armageddon. But as long as “California’s cities,” or for that matter, the State of California itself, means Democrat politicians and the unions and unionized employees who own them, that ain’t gonna happen. And if “California’s cities,” or again. California itself, maens the voters, then they would have to give some small indication they have the slightest grasp of reality. Wisconsin voters seem to have actually awkened to what they had done to their own government by habitually electing the Democrat/union complex that nearly bankrupted them. California voters give no indication they have a clue why their government’s are collapsing.

    Interesting, isn’t it, how self-professed “liberals,” who claim to believe in good, effective government, have allied themselves with the very people who are destroying their governments’ ability to function effectively, or in some cases at all.

  • richard40

    To thibaud
    “The key is not to give these cesspools more freedom in the form of more block grants, ie more authority to make a deeper mess of things than they already have, but to clean up our politics and move toward a simpler, cleaner, less opaque system. Universal health insurance, supplemented by reforms like the ACA’s health insurance exchanges, would move us a long way toward that goal.”

    Obamacare as your solution, yeah that is working out really great, not. That DC monstrocity is according to you “simpler, cleaner, less opaque.” Unless maybe it is your comment that is missing the sarchasm tag, then it might make sense.

    The key is competition, the WI reforms introduced competition, where before you had a union mandated monopoly. So your solution, replace all our health care with a national monopoly, Obamacare, with all coverage decisions being dictated by a national board in DC, with no individual or employer choice in coverage decisions, I dont think so.

  • thibaud

    richard40 – enough already with your tedious and pathetic straw man non-arguments. No one here is arguing for “replacing all our health care with a national monopoly.” And I have repeatedly made clear that that ObamneyCare/RobamaCare is not “my [preferred] solution.”

    I agree with the ~20% of those who tell pollsters that they oppose the ACA because it doesn’t go far enough.

    It’s a half-arsed patch, based on a Heritage Foundation/GOP idea (the individual mandate) that fails to correct the essence of the problem – the power of useless and venal for-profit insurers like UnitedHealth – and that does nothing to sever the link between insurance and employment.

    Also, you really need to get your facts straight re. the WI situation. A corrupt relationship with an affiliated entity is the opposite of a regulated, transparent public monopoly.

    Which, again, just to make it crystal clear for you, is not what we’re talking about anyway.

    The real solution is a backstop of universal health insurance supplemented by optional, and heavily regulated, private insurance.

  • thibaud

    Path forward: GOP Sen. Lamar Alexander proposes that Medicaid be nationalized, ie that the states give up funding for and management of what Robert Samuelson rightly calls their “albatross”, in exchange for the Feds ceasing to shovel money to the states for education.

    A superb idea, and yet another big step – the Roberts decision was one; another is the accelerating trend toward “full clinical integration” ie hospitals and docs cutting out the insurers and wrapping up provision and payment in one efficient hospital-centric entity – toward universal health insurance.

    Here’s Sen. Lamar alexander’s “Grand Swap” – “let Washington handle healthcare and let the states handle the schools”:

  • Jim.


    So your solution is just “set rates, mail checks”?

    You know that our programs that already do this — Medicare and Medicaid — find it impossible to control costs, right? You do realize that those specific, massive, uncontrollable programs are driving our country into bankruptcy, don’t you?

    The idea that expanding those is a good idea, making yet more promises we can’t keep, is just plain absurd.

    Leftists have programs that are doing what they say should be done. They’re not working. Make those work before you expand them.

  • thibaud

    Jim – you’ve completely ignored the central fact that a government-run health insurance in every other major country is MORE EFFICIENT AND LESS EXPENSIVE, by every measure, than our own system.

    So obviously, if our system is less efficient and twice as expensive, then the reason for same cannot be due to the one aspect of our system that we have in common with those less expensive, more efficient systems to the north and across the pond.

    One can argue that some of the US inefficiency is due to preferences regarding treatments – especially extremely costly end-of-life treatments to keep grandma alive another week or two at a cost of $100,000-200,000

    You can also point to the wildly divergent costs for the same treatment across the country, as Atul Gawande of showed in his superb New Yorker piece a while back. Everyone agrees we need to move away from fee-for-service and move toward outcomes-based compensation.
    Malpractice premiums are too high, use of ERs for primary care of the uninsured is ruinously expensive, etc etc.

    But it’s foolish and contrary to the facts to blame the one feature of our system that unites it with those vastly more efficient systems in other countries.

    I really think this discussion would be greatly helped if you were to actually ask some of those hundreds of millions of people around the civilized northern world (plus Australia/NZ) whom you characterize as “leftists” whether they would be willing to swap their health insurance systems for our joke of a kludge.


  • Jim.


    You’re arguing from ideology, not facts here. When someone empirically points out, “we’re going broke because of data set ‘a’,” it’s absurd to argue “but data set ‘a’ is a subset of ideology ‘b’, which I know to be perfect, therefore dataset ‘a’ is obviously invalid.” It’s sloppy thinking, at best.

    As for what people around the world think of our medical system, I could just drive up the freeway to Stanford and ask a few of the patients there how it compares to the medical care in their home countries, only I don’t speak enough languages. Fortunately, English-speakers like me can still learn about relative quality of medical sectors because we can read medical research literature, because such an overwhelming amount of it is one in this country. Not to mention all the medications being developed by our private biotech sector.

    Thibaud, I’m not asking you to post the answer to this question on the internet, but just think about it: would you be alive today if it weren’t for the discoveries and treatments developed by the medical industry the US currently has? How could you, in good conscience, destroy that for those suffering from diseases yet-uncured? Especially considering the fact that prices fall so dramatically when patents run out.

  • tom k

    I’m just a simple man who doesn’t dazzle with words to make my opinion appear more valid. Doesn’t Cuba quarantine their AIDS patients? Don’t many Canadians come here for MRI’S and other imaging? Their waiting list are legendary.Remember Danny Williams, Premier of Labrador and Newfoundland who came here for his heart surgery. What does that tell you? Doesn’t sound more efficient to me. I don’t know about other countries the size of one of our states do, but the fraud alone in Medicare and Medicaid could go a long way to fund their health care.

  • johnnycrash

    @thibaud. Do whatever you want with your money. Form a democratic health care exchange for all I care. Just leave me and my money out of it. Get rid of the mountains of regulations piled on health care. Pile them on your health care if you think you need them. I will gladly go to an unregulated doctors office or hospital. You can keep Medicare and Medicaid, but I want out. I want my premium back. I don’t want to be a part of it. You use words like price-elasticity so you should understand that Medicare and Medicaid by taking a trillion dollars and giving it to people and forcing them to spend it health care just raises prices. You can keep lawsuit health care. I will gladly give up my right to sue for human error or side effects of FDA approved drugs, in exchange for cheaper health care. Heck get rid of the FDA. You can keep the FDA, but I want out. I will gladly use drugs that are tested and certified by a non governmental organization, or maybe, if I want to I will take an untested drug if I’m desperate. You can benefit by studying my corpse if you want…for a fee. Don’t force me to buy anything, don’t tax me, don’t regulate me, don’t tell me what drugs I can take, just get the hell out of my life.

  • thibaud

    Jim, all due respect, but that’s a straw man. No one is arguing against funding our super biotech industry or the US/European pharma industry. Those companies’ retained earnings and investment capital do not depend in the slightest upon the maintenance of a vast and corrupt for-profit health insurance sector.

    The point here, again, is how we will pay for our health care. I propose that we adopt the heart of every other civilized nation’s system and fund it openly, transparently, and appropriately, through the tax system.

    As opposed to our current system’s Rube Goldberg fun house, the one with all the hidden trap doors, curved mirrors, dark rooms and corridors to nowhere.

  • thibaud

    It’s really rich to keep hearing stories about Medicaid fraud when not one person even acknowledges the existence of that sinkhole of for-profit health insurer corruption, the company that allowed its CEO to loot it, and their policyholders, doctors and the public, for literally BILLIONS.

    One insurance company, one man: billions stolen.

    Not a peep about Bill McGuire or UHC. And you guys consider yourselves vigilant defenders against fraud.

  • Jim.


    We fund Medicare and Medicaid through the tax system.

    They are going bankrupt, and us with them.

    Fix that before we start making more promises we can’t afford to keep.

    Even then, we probably shouldn’t make more promises like that at all; those countries you so admire are sacrificing children to support their welfare states. None of them has a fertility level at replacement.

    Europe is dying of Eurosocialism. We don’t need to follow their lead.

  • Jim.


    Also… look at where the profits actually go in the Health sector. Big Pharma, with its newest miracle pills? Huge profits. Big Bogeyman Insurance? Below average profit margins.

    Follow the money. The money goes to our miracle factories, not insurance.

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