AFSCME

Unions’ Shifting Lame Duck and NLRB Agenda

by Ivan Osorio on November 22, 2010

in Bailout Watch, Economy, Labor, Regulation

With Democrats losing control of the House of Representatives and a substantial number of seats in the Senate, organized labor’s hopes of seeing its legislative agenda enacted are fading fast. But that won’t keep union bosses from trying, in two ways. First, a last-ditch push in the current lame-duck session of Congress; and second, shifting efforts away from the legislative to the regulatory process, specifically in the National Labor Relations Board (NLRB). Thankfully, this shift in union strategy is getting some public attention — and more is needed.

In Congress, Big Labor’s allies are most likely to focus on passing bills bailing out underfunded union pensions and forcibly unionizing state and local government public safety employees. As my colleague F. Vincent Vernuccio and I noted recently in Forbes regarding the proposed bailout:

During the lame duck session, the main Big Labor priority to watch out for is a union pension bailout. Introduced in the House (Create Jobs and Save Benefits Act, H.R. 3936) by Rep. Earl Pomeroy (D-N.D.) and in the Senate (Create Jobs and Save Benefits Act, S. 3157) by Rep. Robert Casey (D-Penn.), this legislation would create a new fund within the Pension Benefit Guaranty Corporation ( GRTYA.PK - news -people ) (PBGC), through which it would direct taxpayer dollars to shore up some underfunded union pension plans. The use of public funds to insure private pension plans is a first for PBGC and stark departure from the way it has operated since its creation in 1974.

Earl Pomeroy lost his reelection bid, which makes the prospects for his legislation dim. However, just because unions lost one champion of this legislation does not mean they cannot find another. Pomeroy was an odd sponsor of such legislation anyway; unions are not exactly political powerhouses in North Dakota, which is a right to work state.

The so-called Public Safety Employer-Employee Cooperation Act (S. 3194, H.R. 413) would corral public safety — police, firefighter, and EMT personnel — into unions. For organized labor, this may be its best option for a long-term growth strategy, now that more union members works for governments than for private businesses. But states and cities struggling to balance their overstretched budgets, higher labor costs is the last thing they need. As National Right to Work Committee President Mark Mix notes in The Washington Examiner:

Last year, even as the nation’s economy endured a severe recession, state and local employee real compensation rose by nearly 3 percent. Meanwhile, businesses whose revenues were plummeting had no choice but to cut back real compensation for private-sector employees by 4 percent.

Incredibly, Reid and many likeminded senators and representatives now appear eager to put an even more onerous burden on private-sector employees and employers so that already bloated unionized government payrolls can keep expanding.

The Public Safety Employer-Employee Cooperation Act would force countless policemen, firefighters and emergency medical technicians to accept as their monopoly-bargaining agent a union they never voted for, and want nothing to do with. All contrary state laws and local policies would be overridden.

Even in many states that already authorize public-safety union monopolies, the bill would widen their scope. That’s why the vast majority of the 50 states will be forced either to rewrite their public-sector labor statutes, or hand over control of their public-safety officers to the federal government, if it becomes law.

Moreover, as former Service Employees International Union second-in-command Anna Burger has boasted, it would “create a national collective,” i.e. monopoly, “bargaining standard for all [state and local] public workers.”

Meanwhile, the fight over card check and other pro-union legislation is shifting to the NLRB, where Board members Craig Becker and Mark Gaston Pearce — both recess-appointed by President Obama — are likely to push Big Labor’s agenda. As Katie Gage of the Workforce Fairness Institute notes in The Daily Caller:

Recently, the NLRB has taken action to favor labor bosses over employees and employers. Obama’s appointees to the board are carrying Big Labor’s water, and our freedoms and jobs are at risk.

Cases that have been decided and closed for years are now being reopened by these new board members, who aim to change pro-worker and pro-small business decisions into pro-union boss ones.

For example, most recently, the board backed unions in their practice of holding protest signs at small businesses who use contract workers, claiming that the signs are not coercive.

In addition, the NLRB is now considering implementing electronic voting services for remote elections as opposed to worksite elections where physical ballots are both cast and counted, a move that would open elections to potential fraud and workers to intimidation.

And now there is discussion that this “independent federal agency” will shorten the amount of time for workplace elections even though most take place within a month. While Big Labor bosses could begin planning and organizing months ahead of an election being called, small business owners could be caught unaware and have only a few days to make their case to their own employees.

The lame-duck session ends next month, but Becker’s and Pearce’s recess appointments run through the end of the next session of Congress, so they’ll be on the Board through 2011. The NLRB bears watching.

For more on labor, see here and here.

The Stealthy Public Pension Time Bomb

by Ivan Osorio on October 29, 2010

in Bailout Watch, Economy, Employment, Labor, Regulation

As state and local government budgets have come under increasing stress, greater public attention has come to focus on government employees’ compensation. This greater scrutiny has led to public anger over public employees’ generous compensation (along with their iron-clad job security). Naturally, this has put public employee unions and their allies on the defensive. Some have responded with publications that essentially retort, “It ain’t so!” In The American, Andrew Biggs of the American Enterprise Institute, responds to that defense. As he notes, a significant such study, by the Center on Wage and Employment Dynamics (CWED) at the University of California-Berkeley, makes an important miscalculation:

The basic problem with CWED’s treatment of benefits is that it assumes data showing what employers currently pay toward benefits is equal to what employees will actually receive. In the short-term, this assumption is fine, since many employee benefits are consumed today. But in the public sector, a large share of compensation is deferred to retirement in the form of pension benefits and retiree health benefits. The CWED study significantly underestimates the value of deferred benefits.

As many people are aware, public sector defined-benefit pension plans are significantly underfunded. Using private sector accounting standards, which is necessary to make apples-to-apples comparisons, the typical public pension is less than 50 percent funded. When pensions are underfunded, compensation from pensions is underestimated.

Thus, although the CWED study argues that California’s public sector employees receive pension benefits equal to 8.2 percent of their total compensation, that’s not exactly true. Their data actually shows that California public employers are paying 8.2 percent of employee compensation toward pensions, but that is only around half what employers should be paying. And since public pension benefits are guaranteed, that extra amount will be paid sooner or later. A good guess of true public pension compensation is to divide the reported pension contribution of 8.2 percent by the 50 percent funding level of California pensions, producing a value for promised pension benefits of 16 percent of compensation. This increases the 2 percent pay advantage that the CWED study already acknowledges to a public sector pay premium of around 10 percent.

So, in addition to threatening state and local government finances — and thus by extension taxpayers — public employee pension underfunding also partly obscures the real cost of public employee compensation. For government employee unions and the elected officials they support, this politically convenient, since they simply pass on the cost to future taxpayers, while mitigating current taxpayers’ wrath. For some insight into how they do this, it’s worth reading the study by Biggs and Eileen Norcross of the Mercatus Center (who’s also a former CEI Warren Brookes Journalism Fellow), on the public pension underfunding crisis, published by Mercatus. In a word, public pension managers have been overestimating investment returns for years. They focus on New Jersey as a case study.

The state reports that its pension systems are underfunded by $44.7 billion, when liabilities are discounted at the 8.25 percent annual return that New Jersey predicts it can achieve on funds’ investment portfolios.

However, when plan liabilities are calculated in a manner consistent with private sector accounting requirements, methods that economists almost universally agree are more appropriate, New Jersey’s unfunded benefit obligation rises to $173.9 billion. This amount is equivalent to 44 percent of the state’s current GDP and 328 percent of its current explicit government debt.

Such unrealistic investment return expectations lead to further underfunding. One necessary first step to alleviate this situation, Biggs and Norcross note, is honest accounting.

In addition to understating funding requirements, using a high discount rate to value public pension liabilities encourages plan managers to invest in higher risk portfolios in order to target the expected rate of return, producing bad incentives in the management of pension assets. Instead, financial theory suggests pensions should be discounted according to the lower risk (and lower return) Treasury bond rating of 3.5%.

Government employee unions are a formidable political force. However, the public pension underfunding problem is so large now that public support for reforms to get states out of the red finally has a good chance of carrying the day, as it did in Utah. As Utah State Senator Dan Liljenquist, who helped design and enact a major pension reform in his state noted recently at a Mercatus event (where Biggs and Norcross also presented): “This is not a conservative-versus-liberal issue, this is a reality issue.”

For more on public sector unions, see here and here.

For more on pensions, see here.

Mackinac Appeals Court Decision that would Unionize Independent Home Daycare Workers

by Vincent Vernuccio on October 15, 2010 · 2 comments

in Labor, Legal

Yesterday, the Mackinac Institute of Michigan took another step in its lawsuit challenging the forced unionization of independent daycare workers.

The litigation is in response to the Michigan Department of Human Services (MDHS) deciding that daycare providers, most of whom watch children in their home, are government employees and can be members of a union.

Child Care Providers Together Michigan (CCPTM), an American Federation of State, County and Municipal Employees (AFSCME) and United Autoworkers (UAW) affiliate, has forced 40,000 home day care providers to pay 3.7 million in union dues. The providers, who work out of their home and mostly operate as independent contractors and sole proprietors, have not received any pay increases or health care benefits.

Michigan receives federal subsidies to pay for daycare for children in low-income families. The state uses the subsidy to pay the daycare providers for supplying services to these children. Because Michigan is not a right to work state, the providers have no choice but to pay the dues, which the state automatically deducts from their subsidy checks.
Instead of the subsidy going to low-income families, they are now lining the pockets of union officials.

In May, Patrick J. Wright, Director of Mackinac Center Legal Foundation, filed suit in Michigan court on behalf of Sherry Loar, Michelle Berry, and Paulette Silversion. The three are daycare providers who run operations out of their home and consider themselves owners of the business. Two years ago, CCPTM notified them by mail that they were dues paying members of the union.

Months before, they were asked to vote in a unionization election by a postcard. All three discarded they ballot, which they thought was junk mail. They were not alone. Of the 40,500 home day care workers to be unionized only 6,396 voted — barley 15 percent. Loar commented:

I had gotten the mail…The letter had said that the day care had become part of the union, and we would be paying union dues … [I]t came out as a total shock…The next time I received my co-pay check, they took out union dues! I can’t take money out of an employee’s check without a signature. How can the government take money out of a paycheck? I actually work for my parents and my children. I do not work for the state.

After seeing their union dues automatically subtracted from their Michigan checks in January 2009, the three enlisted the Mackinac Center for assistance. Mackinac though its new legal arm, the Mackinac Center Legal Foundation (MCLF,) sued saying the three are home-based business owners and not government employees. MCLF demanded a court order preventing DHS from taking dues from the women.

On January 5, 2010, the Michigan Court of appeals dismissed MCLF’s case without explanation. MCLF appealed and the Michigan Supreme Court agreed. In a unanimous decision, the Supreme Court demanded an explanation from the lower court. The lower court answered in late September.

“For the second time, the Court of Appeals failed to discuss how private business owners can be made to pay dues to a government employees union,” Wright said. “In fact, the Court of Appeals entered just four sentences of legal assertions, and those managed to avoid the key legal questions. This is surprising, given that the Michigan Supreme Court unanimously ordered the Court of Appeals to explain its first dismissal of the lawsuit.

Yesterday, the Mackinac Center announced it would be appealing the ruling.

Michigan Child Care Workers May Get their Day in Court against Forced Unionization

by Ivan Osorio on September 16, 2010

in Economy, Employment, Labor, Legal

Today, the Michigan Supreme Court ordered a lower court to explain its dismissal of a class action lawsuit challenging a forced unionization scheme for child care workers in the state. The suit. This is welcome news, since this suit takes on directly one of Big Labor’s newest efforts to expand its falling membership: expand the definition of the “public” sector.

For years, government employment is the one area in which unionization had grown at a robust pace, even as unions’ private sector numbers fell precipitously. That trend reached a tipping point last January, when the number of union members in government employment surpassed the number of private sector union members for the first time. There is no reason to expect the trend to reverse.

So, as unions continue to struggle at reviving their private sector fortunes, some are now seeking to redefine many private sector workers as government employees. In Michigan, the United Auto Workers (UAW) and American Federation of State, County and Municipal Employees (AFSCME) partnered to create a child-care worker union whose main purpose was to collect union dues from the state subsidy checks sent to child care providers who served low-income families. As The Grand Rapids Press explains in an editorial:

In 2006, the UAW and AFSCME partnered to form a union called Child Care Providers Together Michigan. The union represents and draws dues from people who care for children from low-income families. The new union members belong either to the UAW or AFSCME, depending on the part of the state in which they live.

Whatever attempts were made to inform child care providers of the pending unionization must have been feeble at best. Only 15 percent of the state’s 40,000 dues-paying providers took part in the vote-by-mail certification election that formed the union. Fully 92 percent of those voting said yes to the union. But they hardly constitute a valid majority of all the now-dues-paying members. Hopefully, the federal lawsuit will uncover how this election was allowed to occur.

The low-income clients provided a rationale — though not a legitimate one — for the forced unionization. The argument is that because providers take public money in state subsidies for those clients, they are therefore public employees. Union dues are taken directly from the state subsidies, money that should go toward child care. The UAW and AFSCME receive 1.15 percent of the subsidies, amounting to more than $1 million a year.

This also gives organized labor a good reason to support the Obama health care legislation. Expanding the definition of “public” to any public service provider who receives any sort of state support gives unions new opportunities to organize health care workers, as more of them are officially deemed ”public” employees.

An Associated Press  story sums up the absurdity of the situation this creates, with one of the plaintiffs as an example:

Peggy Mashke tends to 12 children for 12 hours a day at her home, so she was surprised to get a letter welcoming her to the United Auto Workers union.

“I thought it was a joke,” said Mashke, 50, of northern Michigan’s Ogemaw County. “I work out of my home. I’m not an auto worker. How can I become a member of the UAW? I didn’t get it.”

The current suit was filed by the National Right to Work Legal Defense Foundation; the Michigan-based Mackinac Center for Public Policy has filed a similar suit. This case deserves national attention, as unions in other states are likely to try similar schemes.

For more on public sector unions, see here and here.

Around the Country with Public Sector Unions

by Ivan Osorio on August 10, 2010 · 1 comment

in Bailout Watch, Economy, Employment, Labor

It’s often a sign that a problem is turning into a crisis when the public outcry over it becomes ubiquitous. That seems to be the case with the stress that government employee compensation is placing on government budgets at all levels, as several news items today indicate.

In a front-page story, USA Today reports that federal employees earn far above their private sector counterparts, and that gap has widened considerably in recent years.

Federal workers have been awarded bigger average pay and benefit increases than private employees for nine years in a row. The compensation gap between federal and private workers has doubled in the past decade.

Federal civil servants earned average pay and benefits of $123,049 in 2009 while private workers made $61,051 in total compensation, according to the Bureau of Economic Analysis. The data are the latest available.

The federal compensation advantage has grown from $30,415 in 2000 to $61,998 last year.

Public employee unions say the compensation gap reflects the increasingly high level of skill and education required for most federal jobs and the government contracting out lower-paid jobs to the private sector in recent years.

However, as Reason‘s Nick Gillespie rightly notes, such touting of government employees’ education credentials “probably reflects credentialism run amok as a demonstrated need for specialized skills.”

Moreover, higher salaries are just the beginning. In addition to generous benefits, many government workers enjoy retirement benefits that most private sector workers can only dream of. Negotiated as part of collective bargaining agreements, lavish pensions allow union-friendly politicians to keep their organized labor supporters happy, while they get to kick the can down the road to their successors — when the bill comes due, it becomes the new office holders’ problem.

And how lavish can those pensions get? Take the city of Bell, California,  where, The Wall Street Journal notes in an editorial, “City Manager Robert Rizzo stepped down after news broke that he was making $800,000 a year to oversee the blue-collar town of 40,000.”  And he’s just the tip of the iceberg.

According to the California Foundation for Fiscal Responsibility, a nonprofit that advocates pension reform, Mr. Rizzo is hardly alone. The foundation lists 9,111 retired California government workers receiving pensions in excess of $100,000 a year. The top earner, one Bruce Malkenhorst, receives $510,000 a year for his tenure as city administrator of Vernon, California (population, 91). Not including health benefits.

These paydays are the inevitable result of the dominance of government unions in city and state politics. While most private workers have 401(k)-type plans that rise and fall in value with economic growth, unions negotiate guaranteed payouts that stay lucrative whether or not the cities can afford them. California Attorney General Jerry Brown is investigating the Bell episode, but he’d enhance his chances to become the next Governor if he proposed more ambitious pension reform.

That is bad enough, but making that situation even worse is the fact that those same politicians who negotiated those generous pensions have neglected to adequately fund them, while setting up rules that could be gamed to increase payouts — sometimes even beyond retirees’ former salaries. Now those states face huge financial shortfalls, which underfunded pension obligations are making far worse. As the Mercatus Center’s Eileen Norcross and Todd Zywicki note in The New York Daily News:

At 44, Hugo Tassone retired from the Yonkers police force with an annual pension of $101,333 – thanks to overtime pay he tacked on to his $74,000 salary. Tassone told The New York Times it was the pension he could collect after 20 years of service that attracted him to the job in the first place.

He’s not alone. In the last decade, half of the police and firefighters who retired in Yonkers collected pensions that exceeded their base pay, in (at least one case) by as much as 75%.

Don’t blame the officers. New York’s pension rules make it pay more to retire than to work.

[...]

But loopholes and gamesmanship aren’t the only reason why public pension systems nationwide face massive funding shortfalls. They are the result of a perfect storm of flawed accounting, which fueled unrealistic employee demands that were then underfunded by politicians. In plans across the country, during booming years of the late 1990s, many workers were promised retirement payouts that were “too good to be true” and, thus, impossible to make good on.

New York’s budget situation is bad. In California, it’s reached a point that Governor Arnold Schwarzenegger calls “unsustainable.” He lays out the numbers in a Los Angeles Times op ed:

We have $500 billion in government-employee pension debt alone, a mind-numbing figure that is six times the size of our entire state budget and 10 times the amount we spend on education.

[...]

We must also reform California’s pension system for government employees, whose costs to taxpayers for just one of our major pension funds have skyrocketed from $150 million a year a decade ago to almost $4 billion this year. Private-sector workers already struggle to pay for their own retirement. Now they are being forced to pay more and more for the government workers’ retirement, at the very time their own retirement accounts have declined. What is worse, in five years those pension costs will grow to well over $10 billion per year, and keep growing from there.

Fixing this will not be easy, but public attention turning to this crisis is a welcome first step.

For more on public sector unions, see here and here.

Preempting State Pension Bailouts

by Ivan Osorio on May 17, 2010 · 1 comment

in Bailout Watch, Economy, Employment, Labor, Regulation

Congress has long used its control of the federal government’s purse strings as a club with which to force states to change laws that fall under state governments’ traditional police powers, such as speed limits and legal drinking ages, by threatening to cut federal highway funds. Given the current trend in government growth, I expect the categories of funds so manipulated to expand.

The two most notorious policies so crammed down states’ throats — the 55-mph speed limit and the 21 legal drinking age — constituted nanny-state social engineering of the worst kind: government forcing behavior on certain citizens for their own good.

However, when it is the money of the nation’s taxpayers, rather than behavior politicians don’t like, that is at stake, pulling such funding may be called for. In his Washington Examiner column today, Hugh Hewitt proposes such a solution to prevent a federal bailout of underfunded state public employee pensions.

Federal spending power was used to oblige states to lower their speed limits to 55 miles per hour a few years back. The same authority could be employed to oblige states to curtail public employee pensions. A new federal statute, stating simply that the Treasury will not be sending assistance to any state awarding any new six-figure pensions under any circumstances, would be approved by overwhelming margins.

The federal government discouraging state government profligacy is very different from its manipulating federal funds to enact state-level policies over which it should have no authority. For that reason, comparing the two is troubling, even when accomplished by similar means. Still, if the federal government is ever to withdraw funding for any reason, it should be to rein in its own, and other governments’, power.

For more on public sector unions, see here and here.

Virginia Shows the Way in Taking on the Pensions Crisis

by Ivan Osorio on April 5, 2010

in Deregulate to Stimulate, Economy, Employment, Labor, Regulation

As the federal government continues to expand at an ever-growing pace, the Old Dominion is doing things differently. As The Richmond Times-Dispatch explains, Governor Bob McDonnell is trying to get the state to live within its means (and those of taxpayers), focusing on a key issue.

The most significant piece of McDonnell’s budget — though not widely noted — was the decision to trim the pension costs of future state employees. By shifting the model for those hired after July 1 to one that more closely resembles private-sector retirement plans, McDonnell took an enormous step in ensuring the state’s solvency — which should soon emerge as a distinct competitive advantage for Virginia’s economic development — while keeping faith with past promises made to current state workers.

This essential reform would have been impossible if Virginia politics were dominated by the public-sector unions that seem determined to drive California and New York, to name the most prominent examples, into bankruptcy, crippling tax increases — or perhaps both. McDonnell has set an important precedent here.

Indeed, as the Cato Institute’s Chris Edwards notes, Virginia, by barring collective bargaining by public employees, should serve as a model for other states. Almost as important is to depoliticize pension fund investment decisions, which have led pension funds to under-perform.

For more on public sector unions, see here and here.

The Numbers on Public Sector Unions and State Debt

by Ivan Osorio on April 5, 2010

in Economy, Employment, Labor, Regulation

In today’s Washington Examiner, David Freddoso outlines the close correlation between state government debt and public sector unions. As he notes, “the states with the highest per-capita debt all have something in common: Robust public-sector unions that have, over the years, cut sweetheart deals with politicians — usually, but not always, Democrats.”

There’s a good reason for that. Public sector unions receive considerable benefit from participating in the political process. In effect, they are working to elect their bosses. This in turn gives politicians an incentive to keep their union supporters happy.

Meanwhile, the costs of public employee rents (compensation above what they would earn in an open, competitive market) are dispersed widely to be borne by the population at large. As a result, public sector unions’ concentrated benefits give them a much greater incentive for involvement in the political process than diffuse costs give the rest of the population.

Now, however, there’s a new force coming into play in this scenario: Weakening state finances. The correlation is clear and voters are starting to notice, as the numbers tell the story.

[T]he states coalesce into three main groups:

  • Among states whose government workers are less than 40 percent unionized, median per capita state debt is $2,238.
  • Among states with between 40 and 60 percent of their government workers in public sector unions, the average debt is $3,609.
  • Among states with more than 60 percent of the government workforce unionized, the average (median) per capita debt is $6,380.

As you keep an eye on the fiscal collapse of California, and New Jersey Gov. Chris Christie’s (R) efforts to rein in the unions’ power next year, bear in mind that this is quickly becoming the biggest fiscal issue in America today.

I couldn’t agree more. Yet state finances look even worse when considering the dire situation of many states’ public employee pensions.

So what to do? Freddoso cites the Cato Institute’s Chris Edwards, who recommends that, “states should follow the lead of Virginia and ban collective bargaining in the public sector.” Of course, getting there won’t be easy, but facing financial collapse could well force what once seemed politically nigh-impossible, as taxpayers decide they’ve had enough.

For more on public sector unions, see here and here.

UPDATE: Chris Edwards also writes about unions and government debt today at Cato@liberty.

Bailout Watch: Union and Public Employee Pensions

by Ivan Osorio on April 1, 2010 · 2 comments

in Economy, Employment, Labor, Regulation

As the strain on state and local government budgets around the country worsens, public employee unions have gone on the defensive, painting themselves as scapegoats for the financial crisis, reports The Wall Street Journal. Union leaders claim that elected officials are taking their financial troubles out on their workers. Yet if public employees are victims of anything, it is of union chiefs’ over-promising of lavish compensation well into the future.

Many on the left (including labor leaders) often call on everyone to pay their “fair share” (usually of taxes). By the logic of their own rhetoric,  public employees should do their “fair share” of cutting back during the recession. That hasn’t been the case.

Many private-company workers have seen their retirement accounts shrivel, while public-sector benefits have been relatively unscathed. Defined-contribution plans such as 401(k)s had $3.33 trillion in assets at the end of 2009, down 4% from $3.48 trillion in 2006, according to the Federal Reserve. Such accounts have lost value even though companies and workers contributed $100 billion over that period.

The rise in public-sector benefits has attracted the ire of citizens like Paul Nelson, a semi-retired investor in Upper Saddle River, N.J. Mr. Nelson, 59 years old, has a son at Northern Highlands Regional High School, where the principal says the school may have to cut teachers and increase class size. “Most public employees have retirement and health-care plans that private-sector employees can only dream of,” says Mr. Nelson.

State and local politicians bear a major share of the blame, not only by extending collective bargaining to the public sector, but also by acceding to union demands time and again. While undesirable, this is understandable. Public officials don’t face the competitive pressures to hold down costs that private businesses face. And while they do face constraints in the size of their budgets and potential negative reaction from taxpayers, those constraints only function in the present.

Thus, many public sector collective bargaining agreements back load benefits, in the form of pensions, well into the future. By the time the bill for those benefits comes due, the politicians who negotiated the union agreements will be out of office, leaving the mess for someone else to sort out. And quite a mess it is.

At the root of governments’ problems today are promises made in past decades. As a group, state and local governments have promised an estimated $3.35 trillion in pension and health-care benefits to be paid over the next three decades, but are estimated to have 70% of the money to cover those payments, according to the Pew Center on the States. Pension and health costs can consume 20% of city and state budgets.

California offers a view of the fallout. The state’s largest pension fund, the California Public Employees’ Retirement System, known as Calpers, is estimated to be only 57% to 65% funded. Having suffered investment losses in recent years, the state has had to dip deeper into its revenues to make up the funding gap. Last year, a budget impasse forced the state to issue IOUs for taxpayer refunds.

It wasn’t long ago that California was going the other way, based on a different set of assumptions. In 1999, the state’s Democratic-controlled legislature and then-governor Gray Davis passed a law expanding benefits for many state employees. A proposal prepared by Calpers—the $200 billion fund that manages money for 1.6 million of the state’s employees, retirees and their beneficiaries—forecast that the boosted benefits would be paid for entirely by investment gains.

In addition to being optimistically generous, public employee pension funds have underperformed because of politicized investment strategies that seek to advance social goals rather than focus exclusively on maximizing returns, as fiduciary duty requires. (It is worth noting that union officials sit on many state employee pension fund boards.)

While some public sector unions have agreed to concessions, it’s been when their employers — state and local governments — are facing financial disaster, as in the case of Toledo, Ohio, which as the Journal reported yesterday, “narrowly averted having the state take over its finances by filling a $48 million budget gap late Tuesday. To tackle that deficit, Mayor Michael Bell had to take on the city’s police and firefighters’ unions and propose other controversial measures.”

As other states and cities work out ways to bring their budgets under control, public employee unions may have to agree to more such concessions, due to dire state of those governments’ finances. But they never should have gotten to that point in the first place.

Worse, many union bosses may decide to wait for a taxpayer bailout rather than make concessions. As columnist Mark Hemingway explains in today’s Washington Examiner, pension underfunding is also a major problem among private sector unions, where a bailout effort is already under way. As he notes, “Rep. Earl Pomeroy, D-N.D., has introduced legislation to explicitly put taxpayers on the hook for failing union plans.”

(Subscription needed for Wall Street Journal links.)

For more on public sector unions, see here and here.

For more on pensions, see here, here, here and here.

“We’re twisting arms. We’re threatening people.”

by Ivan Osorio on March 31, 2010

in Economy, Employment, Labor, Regulation

So said United Teachers of Los Angeles President A.J. Duffy at a rally, which reason.tv now makes available in a new video on public sector unions. As host Nick Gillespie notes, “as unemployment hovers around 10 percent and any sort of recovery seems to be forever and a day away…the one part of the economy that is going gangbusters during the Great Recession is government work.” Now that the number of union members working for government has surpassed the number of union members working for businesses, and compensation for unionized government workers is straining public budgets to a crisis point, this issue needs all the attention it can get.

For more on public sector unions, see here and here.

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