Public Sector Unions’ Heavy Burden on Taxpayers

by Ivan Osorio on January 5, 2010 · 2 comments

in Economy, Labor, Politics as Usual, Regulation

As the old saying goes, when you start getting flak, you must be over the target. That seems like a good reason for the hysterical response by Gerald McEntee, the head of the American Federation of State, County & Municipal Employees (AFSCME), the nation’s largest government employee union, to a recent article in The Economist that explains the burden that public sector unionism imposes on cash-strapped governments — and thus on taxpayers. McEntee, apparently, is outraged at the suggestion that government employees are “spoiled rotten,” and argues that, according to the Bureau of Labor Statistics (BLS), “when comparing pay within occupations public employees do not receive more than their counterparts in the corporate world.” I don’t know to which BLS data McEntee refers, because I’d like to see it. (Paid subscription needed for The Economist story.)

Meanwhile, BLS’s 2008 National Compensation Survey finds mean hourly earnings for public sector workers as being just over $5.00 higher than those for private sector workers. The difference is less “within occupations,” as McEntee insists, and the 2006 edition of the Survey, which found a similar gap, includes a caveat that would seem to justify his distinction.

Earnings averaged $19.29 per hour in June 2006 for civilian workers in the United States. Average hourly earnings were lower for private industry workers ($18.56) than for State and local government workers ($23.99). Part of this difference can be explained by differences in the occupational and industrial composition of the two sectors. For example, high-paying professional and related occupations are relatively more common in State and local government than in private industry.

So far so good, right? Wrong! The Survey compares only “earnings,” which it describes as “regular payments from the employer to the employee as compensation for straight-time hourly work or for any salaried work performed.” In other words, this doesn’t include benefits, which are far greater for public sector workers than for private sector ones.

BLS’s own numbers bear this out. The most recent BLS release on employee compensation (issued December 9, 2009) states that, during September 2009, “[p]rivate industry employer compensation costs averaged $27.49 per hour worked,” while, “[s]tate and local government compensation costs averaged $39.83 per hour worked” — a difference of over $12.00 an hour.

Moreover, a greater proportion of public employees get benefits, and the get a greater employer contributions. According to a July 2009 BLS release:

• Medical care benefits were available to 71 percent of private industry workers, compared with 88 percent among State and local government workers. About half of private industry workers participated in a plan, less than the 73 percent of State and local government workers. (See table 2.)

• Employers paid 82 percent of the cost of premiums for single coverage and 71 percent of the cost for family coverage, for workers participating in employer sponsored medical plans. The employer share for single coverage was greater in State and local government (90 percent) than in private industry (80 percent). For family coverage, the employer share of premiums was similar for private industry and State and local government, 70 and 73 percent, respectively. (See tables 3 and 4.)

• Among full-time State and local government workers, virtually all (99 percent) had access to retirement and medical care benefits. Of full-time workers in private industry, only 76 percent had access to retirement benefits and 86 percent to medical care. Part-time workers had less access to these benefits in both private industry and in State and local government; about 40 percent of parttime workers had access to retirement benefits and about 25 percent had access to medical care benefits. (See tables 1 and 2.)

• Sixty-seven percent of private industry employees had access to retirement benefits, compared with 90 percent of State and local government employees. Eighty-six percent of State and local government employees participated in a retirement plan, a significantly greater percentage than for private industry workers, at 51 percent.

And still that’s not all. As Don Bellante of the University of South Florida, David Denholm of the Public Service Research Foundation, and I note in our Cato Institute study on the topic, another benefit unionized government workers get is job security unlike any found in the private sector. (The online edition of The Economist also features a letter to the editor by Bellante, Denholm, and me.)

[O]ne of the earliest studies (using 1975 data) to take fringe benefits and the incidence of unemployment into account is by Don Bellante and James Long, although their study does not distinguish between union and nonunion employees. The study found that on the basis of hourly pay alone, there was not a significant difference between local-government employees and comparable workers in the private sector. However, adding in the significantly higher value of fringe benefits received at that time by local-government workers gave a slight advantage to local public employees. Further, adding in the effect of differential probability of unemployment spells on expected annual earnings raised the rent element in local government pay levels to over 10 percent.

So what’s wrong with public employees earning well? Nothing. The problem lies in their making so much above private sector workers — and that we’re all paying for it. Taking all of the above into account, McEntee’s assertion that, “it is not government employees who brought the American economy and state and local budgets to the brink of disaster” falls flat. As my co-authors and I also note:

A September 2008 National League of Cities survey of the nation’s city financial officers paints a discouraging picture. “Confronted with declining economic conditions driven by downturns in housing, consumer spending, and jobs and income, city finance officers report that the fiscal condition of the nation’s cities has weakened dramatically in 2008,” says the report. An overwhelming majority of survey respondents identified employee-related costs as having increased substantially: wages (cited by 95 percent of respondents); health benefits (86 percent); and pensions (79 percent). Wages and health care costs were cited by respondents ahead of all other costs, except for inflation (98 percent).

Even worse, the greatest costs associated with public sector unions often do not become apparent for many years, in the form of pensions. As we also point out, “Politicians can further shield themselves from public scrutiny by back-loading the rents paid to their union supporters, so that they come due at a later time, when they will be somebody else’s problem.” As Cato’s Chris Edwards notes, “state and local workers have very generous defined-benefit (DB) pension plans compared to private sector workers. These plans have been overpromised and underfunded, which has created huge long-term gaps in government budgets.” The Pacific Research Institute’s Steven Greenhut, in his cover story in the new issue of Reason, explains the severity of this problem:

Public pensions have swollen to unrecognizable proportions during the last decade. In June 2005, BusinessWeek reported that “more than 14 million public servants and 6 million retirees are owed $2.37 trillion by more than 2,000 different states, cities and agencies,” numbers that have risen since then. State and local pension payouts, the magazine found, had increased 50 percent in just five years.

None of this is likely to deter union efforts to increase unionization in government — and to even stretch the definition of government’s reach. Again, as Don Bellante, David Denholm, and I note:

Now some unions are trying to expand the definition of “public” by trying to organize government contractors. Washington state provides a good example of this. There, the trend began in 2001, when voters approved a ballot measure, Initiative 775, to allow independent long-term health care providers to unionize and bargain collectively over hours, compensation, and working conditions.39 Then in 2007, Washington state authorized collective bargaining for adult-home-care providers who receive Medicaid and other state aid.40 Stretching the definition of “public employee” to any home-care provider who may contract with the state can give a public employee union a foothold in the private sector.

BigGovernment.com features a good history of this new, brazen union tactic.

And brazenness is a trait public employee unions know well. Steven Greenhut explains in City Journal how some government workers game the system:

Government employees use various scams to boost their already generous benefits, which include fully paid health care and cost-of-living adjustments. The Sacramento Bee coined the term “chief’s disease,” for example, to refer to the 82 percent (in 2002) of chief’s-level employees at the California Highway Patrol who discovered a disabling injury about one year before retiring. That provides an extra year off work, with pay, and shields 50 percent of their final retirement pay from taxes. Most of these disabilities stem from back pain, knee pain, irritable bowel syndrome, and the like—not from taking bullets from bad guys. The disability numbers soared after CHP disbanded its fraud unit.

As I document in my new book, Plunder!, government employees of all stripes have manipulated the system to spike their pensions. Because California bases pensions for employees on their final year’s salary, some workers move to other jurisdictions for just that final year to increase their pay and thus the pension. Even government employees convicted of on-the-job crimes continue to collect benefits. Municipalities have adopted Defined Retirement Option Plans, or DROPs, in which the employee earns his salary and his full defined-benefit retirement pay at the same time, with the retirement pay going into an account payable upon actual retirement. And as average Americans work longer to sustain themselves, public employees can retire in their early fifties with their plush benefits.

And yesterday, The Las Vegas Review-Journal provided an example that illustrates how difficult it is for municipalities with unionized workforces  to curb costs:

Last week, two unions balked at the city’s budget-cutting ultimatum: wage cuts of 8 percent in each of the next two years, no salary increases of any kind and no promises to “catch up” at a future date — or else, mass layoffs of public employees.

Firefighters warned that such cuts would result in higher insurance costs and all sorts of carnage because of longer emergency response times. City officials called the warning a scare tactic.

Then the Review-Journal reported that the Las Vegas City Employees Association — the bargaining group that represents most city workers outside of public safety — sent a belligerent letter saying it would not come to the table till every other union had submitted to cuts.

So far the unions have agreed to a reduction in cost-of-living wage hikes of 1 percentage point. Not a pay cut, mind you, just a slightly smaller raise. How generous.

It is the parlous state of state and local government coffers that has raised the considerable interest in government employee unions we are now seeing. If there is a silver lining in this story, it is that this public interest it still appears to be growing, and such interest is not something union bosses are likely to welcome. As my co-authors and I explain in our letter to the editor in The Economist online, public employee unions’s political advantages can only outrun economic reality for so long.

SIR – Public-sector unions have entrenched their privileges through a combination of political dynamics that have proven extremely difficult to overcome. For example, the ability of taxpayers to move away from jurisdictions where they consider the pay of public employees to be excessive is severely circumscribed by the costs of moving itself.

The benefits enjoyed by unionised government workers give those workers a very strong incentive to work to influence the political process. By contrast, the taxpayers who must bear the costs of those benefits do not have a comparable incentive for political involvement, because those costs are widely diffuse and therefore are not as visible. Such an arrangement can only last so long before it runs headlong into economic reality, as the 2008 bankruptcy of Vallejo, in California, made clear.

For more on public sector unions, see here and here. (Thanks to Marc Scribner for help looking up BLS data.)

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