EFCA

Reason’s Shikha Dalmia on EFCA’s Binding Arbitration Provision

by Ivan Osorio on July 13, 2009

in Economy, Labor, Regulation

With Al Franken joining the Senate, public attention is again turning to the so-called Employee Free Choice Act (EFCA). In the weekend Wall Street Journal, the Reason Foundation’s Shikha Dalmia makes the case against EFCA’s binding arbitration provision, which has not gotten nearly as much public scrutiny as its now-infamous secret ballot-circumventing card-check provision.

As she notes, many state and local governments have extended compulsory arbitration to their employees, especially public safety workers, in exchange for their giving up the right to strike — to those governments’ subsequent chagrin.

Exhibit A: Michigan.

In 1969, the Wolverine State embraced a form of compulsory arbitration nearly identical to the one proposed in EFCA to resolve disputes with its police and firefighters. Years later, Detroit mayor Coleman Young — who had authored the original law as state senator — rued what he had done. “We now know that compulsory arbitration has been a failure,” he lamented to the National Journal in 1981. “Slowly, inexorably, compulsory interest arbitration has destroyed sensible fiscal management and has caused more damage to the public service than the strikes it was designed to prevent.”

Here’s why:

This process is supposed to install a contract expeditiously. But a review of 29 arbitration cases in 2005 and 2006 by the Michigan-based Mackinac Center for Public Policy found that the average time involved in a case was almost 15 months — not the four-and-a-half months that the law prescribed, defeating its whole purpose. Moreover, because an arbitration board doesn’t have to live with the consequences of its decision, it has no reason to come up with a workable solution — just one that is politically expedient.

This kind of arrangement has contributed to the dire fiscal situations in which many states and localities now find themselves. During the 1990s boom, increased tax receipts from economic growth enabled governments to pay increased wages and benefits imposed by arbitration. But as the economy turned south, tax revenues have gone down even as those commitments have stayed the same (or even grown).

And now organized labor wants to wrap this millstone around the necks of private employers.

Should EFCA pass, the costs of compulsory arbitration in the private sector will dwarf those in the public sector. That’s because businesses, unlike government, can’t just bill taxpayers to pay off unions. They have to compete.

In a dynamic economy, a business’s survival depends upon its ability to constantly cut costs and innovate. But a company forced into binding arbitration will be frozen for two years (the duration of the initial contract) from making any changes to any aspect of its business that is covered by the contract. Literally every issue — from its 401(k) contributions to its reliance on outside labor — could potentially become subject to review by a government panel that has neither the company-specific knowledge nor the incentive to turn a profit.

In fact, if some unions had their way, 401(k) contributions would be replaced with payments into critically underfunded multi-employer union pension funds. For newly unionized companies brought into these plans, this would represent tens of millions in new liabilities. For many of those companies, it could spell doom. And for what? To subsidize organized labor’s use of pension funds for political activism.

For more on EFCA’s binding arbitration provision, see here.

For more on EFCA in general, see here.

Motoring around the World on Motor City Workers’ Dime

by Ivan Osorio on June 15, 2009

in Economy, Labor, Politics as Usual

Detroit can astound even the most seasoned political cynic, and now it’s done it again. As the Detroit Free Press reports, the trustees of the city’s two public employee pension funds have been enjoying perks that even some CEOs would envy, apparently on the pensioners’ dime.

The trustees who oversee Detroit’s two public pensions, their lawyers and staff spent $380,000 over the past year circling the globe to attend conferences — often traveling in packs, with virtually no limitation on where they went or how often they traveled.

Trustee Ronald Gracia spent the most time on the road — billing the General Retirement System for $105,000 in travel, including three trips to Singapore and $18,600 on travel to Hong Kong, according to records provided by the pension funds.

The two public pensions, with 21 trustees, have guarded their travel records from scrutiny. The Free Press sued to get the records — which are actually only summaries from the past year.

The funds have yet to turn over actual receipts that would show, for instance, where trustees and staffers stayed and how they spent some of the money. Other documents have been destroyed.

Such apparent graft by public officials is hardly new, but today it should ring alarm bells about defined benefit pension funds in general, and union pension funds specifically. Many union pension funds today are severely underfunded, so any workers who could be made to join such funds should be concerned.

The so-called Employee Free Choice Act’s binding arbitration provision would do just that, by enjoining a federally appointed arbitrator to impose a contract on a newly unionized company that could include a provision for workers to join the pension fund of the union that now represents them, and for the employer to pay into it. (Thanks to Marc Scribner for the Free Press link.)

For more on pension funds, see here, here, and here.

Feinstein Withdraws Support for EFCA (for now)

by Ivan Osorio on June 3, 2009

in Economy, Labor

California Democratic Senator Dianne Feinstein is withdrawing her support for the so-called Employee Free Choice Act (EFCA), organized labor’s top legislative priority, reports a California news station. She joins two Democratic colleagues, Blanche Lincoln (Ark.) and party switcher Arlen Specter (Penn.), in opposing the bill. (Log-in required to view KHTS news story.)

While this is a serious blow to EFCA in its current form, Democratic leaders are working on devising a “compromise” that would likely not include the current bill’s card-check provision, which would effectively do away with secret ballots in union orgaizing elections, while keeping EFCA’s other harmful features.

Chief among these is EFCA’s binding arbitration provision, which would enjoin a federally appointed arbitrator  to impose a contract on newly unionized companies if the company’s management and the union do not reach an agreement after 120 days. Needless to say, the arbitrator is unlikely to have any knowledge of the company’s operations.

Thus, a newly unionized company could find itself burdened with millions in new liabilities in the form of obligations to pay into union a pension fund, as required in the new arbitrator-imposed contract. As Diana Furchtgott-Roth of the Hudson Institute found, many such funds are severely underfunded, especially in comparison to private company funds. It is for this reason that the Teamsters are currently threatening to shut down the Minneapolis Star-Tribune.

Sen. Feinstein’s switch is very good news, but it is not the end of this fight. Card check may have receded, but binding arbitration still looms on the horizon as a threat to economic recovery.

UPDATE: Indeed, the Huffington Post’s Sam Stein quotes a “confidant of the senator” as saying: “She is looking for a compromise. And anyone who says otherwise is engaging in some wishful thinking.”

I’d call this strategic fence-sitting.

For more on EFCA, see here.

The AFL-CIO’s “Creative Accounting”

by Ivan Osorio on May 29, 2009 · 2 comments

in Economy, Labor

The AFL-CIO has obscured its poor financial condition through “creative accounting,” says Machinists union President Tom Buffenbarger, reports Associated Press.

Tom Buffenbarger, president of the International Association of Machinists and Aerospace Workers, said in a report that the labor federation obscured its financial difficulties heading into last year’s presidential election campaign, in which it backed Democrat Barack Obama. Net assets of the 11 million-member AFL-CIO declined to a negative $2.3 million as of June 30, 2008, from a $66 million surplus on July 1, 2000.

“A new leadership — leaders chosen by our members, leaders help accountable by our members — is needed,” wrote Buffenbarger, who is a member of the AFL-CIO’s finance committee and the president of one of the nation’s largest unions. Alison Omens, a spokeswoman for the AFL-CIO, declined to comment on the report.

Where all that money has gone would take considerable financial detective work to determine, but there are a few obvious places to start looking. First, as the report notes, the AFL-CIO lost more than $13.9 million in annual revenue as a result of the Service Employees International Union, the Teamsters, and some other unions leaving the AFL-CIO in 2005 to form the new labor federation Change to Win.

But that steep drop in revenues seems not to have cooled the AFL-CIO’s aggressive use of pension funds to advance political goals. This is part of a deliberate strategy, as I wrote in 2005, on a Federalist Society-sponsored panel discussion on institutional investors, where the issue of fiduciary duty proved contentious.

AFL-CIO Associate General Counsel Damon Silvers sought to define union pension fund managers’ fiduciary responsibility broadly. First he pointed out that, “There’s a big difference between union and pension funds,” because pension funds have one function, while unions have several functions, and that the AFL-CIO, its affiliates, and “ex-affiliates” — the unions who bolted the old federation and formed Change to Win — seek to maintain that distinction. By this definition, unions’ fiduciary responsibility for their investments does not just address the return on those investments, but how they can advance the unions’ greater goals. As Silvers said, union fund managers must ask the question, “Are these assets being managed in our interest?”

The problem with this view is that such interest can be defined very, very broadly.

Earlier this year [2005], the AFL-CIO successfully pressured some banks and brokerage firms to distance themselves from organizations supportive of the Bush Social Security plan to create private accounts. In a letter to AFL-CIO General Counsel Jonathan Hiatt dated May 3, 2005, Department of Labor Deputy Assistant Secretary for Program Operations Alan Lebowitz stated that, “The Department reiterates its view that plan fiduciaries may not increase expenses, sacrifice investment returns or reduce the security of plan benefits in order to promote collateral goals.” According to The New York Times, the unions’ anti-Social Security reform campaign also involved protest rallies in New York, Washington, San Francisco, and 70 other cities.

The Labor Department was right to call the AFL-CIO on this dubious use of pension funds they are entrusted to manage in the individual pensioners’ interest; any definition of fiduciary that seeks to go beyond increasing shareholder value is mere sophistry. Yet that is precisely what the AFL-CIO has pursued as a deliberate strategy. As Diana Furchtgott-Roth of the Hudson Institute notes in a study of union pension funds:

Over the years, unions have successfully changed the operative meaning of fiduciary duty. This process of change started in the early 1990s when the AFL-CIO published Proxy Voting Guidelines. These guidelines encouraged union pension funds to consider not only how investment decisions would affect a pension fund’s financial performance, but also the effect of these decisions on communities, the environment, and the economy. This overly broad interpretation of “fiduciary duty” has allowed unions to join forces with others in the left-leaning progressive community by making investment decisions whose goals are not always consistent with traditional investment strictures.

In her study, Furchtgott-Roth found that union pension funds are severely underfunded compared to private company pension plans. (The current AFL-CIO proxy voting guidelines can be perused here; see page 21 for the “Corporate Responsibility” section.) While Furchtgott-Roth’s study does not single out the AFL-CIO, and Buffenbarger does not specify pensions as a source of trouble, the AFL-CIO is doing a lot of pensioners no favors by promoting a definition of “fiduciary duty” that concerns itself with political activism.

With union pension funds facing severe shortfalls, the obvious first step for unions seeking to address that problem would be to stop digging — that is, focus on shareholder value without other considerations to cloud investment decisions. But rather than opt for a more conservative investment strategy that they have followed to date, union leaders seem more intent on getting access to more dues by corralling in new members, though changes in the law such as the so-called Employee Free Choice Act’s (EFCA).

EFCA’s card-check provision, which would have allowed unions to circumvent secret ballot elections in organizing campaigns, turned out to be a public relations disaster for organized labor — for good reason. Now, however, union activists and their allies on Capitol Hill are looking for ways to get enough support for a “compromise” that would include EFCA’s binding arbitration provision. Under this provision, if a newly unionized company would have 120 days to reach an agreement with the union that had just begun representing its employees. After that period, a federall appointed arbitrator can come in and impose a contract — including retirement benefits.

Thus, literally overnight, a business could find itself on the hook for millions in pension obligations which it did not itself assume. For the union, this allows it to keep its pension fund going for some time longer. For the company, it could spell disaster.

As far as the government is concerned, it should maintain union financial reporting requirement at least at their current level. Rolling them back would allow greater obfuscation of the kind Buffenbarger is denouncing. Moreover, when workers decide on whether to join a union or not, they need to know what they would be getting into.

Lincoln Remains Opposed to EFCA

by Ivan Osorio on May 11, 2009

in Economy, Labor

The possibility of parts of the so-called Employee Free Choice Act (EFCA), specifically EFCA’s binding arbitration provision, coming back into the political arena has focused public attention on how some centrist members of the Senate might vote on cloture if an EFCA-minus-card-check bill were to be introduced. EFCA’s card check provision, which would allow unions to circumvent secret ballots in organizing elections, was extremely controversial and proved unpopular.

Under EFCA’s binding arbitration provision, if a newly unionized company and the union cannot agree on a contract after 120 days, a federally appointed arbitrator can then step in and impose a contract. This provision is finally getting some public attention — including recently from George McGovern. While it would be ideal to see EFCA defeated in toto, the good news is that right now the centrist Senators who hold the balance of power on this issue are unlikely to support binding arbitration. The Hill‘s Michael O’Brien reports:

Sen. Blanche Lincoln (D-Ark.) indicated last week she does not favor the so-called “binding arbitration” part of the Employee Free Choice Act (EFCA) as currently written.

Lincoln joins two other centrist Democrats in opposition to the second key component of EFCA favored by organized labor, making it difficult for a final compromise of the bill including the provision to overcome a Senate filibuster. …

Sens. Arlen Specter (D-Pa.) and Ben Nelson (D-Neb.) have expressed their qualms about the arbitration section.

For more on EFCA, see here.

George McGovern on Binding Arbitration

by Ivan Osorio on May 7, 2009

in Economy, Employment, Labor

With Democrats just shy of the 60 votes they need to end a filibuster, the fate of the so-called Employee Free Choice Act remains in the balance in the Senate. While the current version of the bill seems unlikely to pass, EFCA supporters are likely to try alternative versions. One such option is EFCA without its controversial card check provision, which would allow unions to circumvent the secret ballot in organizing elections, and has been the bill’s most controversial provision to date.

However, EFCA-minus-card check would still be economically toxic. Specifically, its binding arbitration provision would put businesses at the mercy of the federal government. In today’s Wall Street Journal, former U.S. Senator and Democratic presidential candidate George McGovern, who recently has spoken out against EFCA’s card check provision, explains binding arbitration’s danger:

Currently, labor law maintains a careful balance between the rights of businesses, unions and individual employees. While bargaining power differs depending on individual circumstances, the rights of the parties are well balanced. When a union and a business enter negotiations, current law requires that both sides bargain “in good faith.”

In a contract negotiation, each party typically perceives the other as too demanding. But no one loses their right to contract willingly or suffers being forced to agree to anything. Employees can strike if they feel that they have been dealt with unfairly, but it is a costly option. Employers are free to reject labor demands they find to be too difficult to accept, but running a business without experienced employees is itself difficult. Both sides have an incentive to press their demands, but they also have compelling reasons not to press their demands too far. EFCA would disrupt that balance by enabling government-appointed lawyers to decide what they believe is fair or reasonable.

A federally appointed arbitrator cannot be expected to understand the nuances specific to each business dispute, the competitive market position of the business, or the plethora of other factors unique to each case. Yet fundamental decisions on wages and benefit costs, rules for promotions, or even rules for exiting an unprofitable line of business could fall to federal arbitrators under EFCA.

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

Specter Switches, Says He’ll Still Oppose Card Check, Then What?

by Ivan Osorio on April 28, 2009

in Economy, Labor, Politics as Usual

There’s nothing worse for an economy than uncertainty. Today, Pennsylvania Senator Arlen Specter has thrown large swathes of America’s struggling economy into a guessing game, with his announcement that he plans to switch parties from Republican to Democrat.

While he has indicated that he would not switch his vote on cloture against the so-called Employee Free Choice Act (EFCA), he will likely be under pressure from his new fellow Democrats and organized labor to switch that vote, as The American Spectator‘s Phil Klein notes. However, Specter will also be under pressure from businesses in his state, and his stating now that he would maintain his opposition to EFCA could be intended to preempt pressure from his new pro-union allies.

Here’s hoping for the latter scenario. What Specter’s switch means for his other votes, however, is anyone’s guess.

For more on card check, see here.

“A good time to start liquidating”

by Ivan Osorio on April 14, 2009

in Economy, Labor

How damaging would the so-called Employee Free Choice Act be to businesses? Enough to force some healthy companies into bankruptcy. Specificaly, EFCA’s binding arbitration provision could lead to newly unionized companies being forced to assume unsupportable new pension liabilities. Thus explained Brett McMahon of the construction firm Miller & Long, speaking to bloggers at The Heritage Foundation today.

EFCA supporters have tried to sell the legislation’s binding arbitration provision as a guarantee of first contract. In fact, it’s a recipe for a government-imposed contract. Under this provision, the company and the newly certified union have 90 days to negotiate a contract. If they have not reached a contract after that time, they must negotiate for another 30 days, at the end of which period a federally appointed arbitrator may step in and impose a contract. This creates incentives for the union negotiators to stall, and thus get a lot of what they want through arbitration.

McMahon describes this 120-day period as “a good time to start liquidating,” since newly unionized companies would then be required to enter into union pension funds, most of which are supposed to back multi-employer defined-benefit plans. “The problem’s they have no money,” said McMahon. “They were losing money hand over fist for a long time,” for various reasons, some of them demographic.

Employers who wish to back out of such plans must pay a withdrawal fee, because, unlike single employer private pension funds, multi-employer funds are insured primarily by the participating employers, not the Pension Benefit Guaranty Corporation (PBGC). This is an especially bad deal for workers, who could face huge losses when their pension funds default. Unlike single employer plans, which the PBGC insures for up to $54,000 per worker per year, the PBGC can only pay out to a miserly $12,870 per year.

For the company, it means millions (in some cases billions) in new liabilities, which must be stated under FASB 157 mark-to-market valuation rules, which as my colleague John Berlau has noted, force companies to overstate liabilities by making them price assets at what are essentially liquidation prices. Thus, otherwise healthy companies can suddenly find themselves burdened with pension obligations they cannot support. To illustrate how bad these could get, McMahon cited the example of United Parcel Service, for which the least expensive option was to pay $6.1 billion to get out of the Teamsters’ Central States pension fund.

I asked McMahon to comment on the reason so many union pension are underfunded: shareholder activism. He cited the example of the California Public Employee Retirement System (CalPERS), which, as a result of eschewing investments in politically incorrect industries, such as tobacco, has suffered opportunity losses of 17 to 18 percent. (I also referred the group to a study by Diana Furchtgott-Roth of the Hudson Institute for background on this topic.)

McMahon rightly characterized this kind of activism as a dereliction of fiduciary duty by pension fund administrators. “Their duties are fiduciary. Their duties are to the people who put their money in their trust,” he said. “They don’t act properly” by making investment decisions based on political criteria, rather than on which investments can provide the best returns. Shareholder activists often seek to promote a broad leftist ideological agenda, often in concert with other left-liberal constituencies (as a Politico article cited at the briefing today illustrates).

For more on EFCA, see here.

Lincoln To Vote No on Card Check

by Ivan Osorio on April 6, 2009

in Economy, Labor

Arkansas Democratic Senator Blanche Lincoln announced today that she will oppose the so-called Employee Free Choice Act, also known as teh “card check” bill. With Pennsylvania Republican Arlen Specter announcing his opposition last week, pro-EFCA forces’ chances to muster 60 votes to break a Republican-led filibuster look increasingly slim — for this Congress.

We can now expect organized labor to sink millions (from member dues, of course) into Senate races in 2010.

For more on card check, see here.

Osorio: Specter Says ‘No’ on Card Check

by Richard Morrison on March 24, 2009

in Economy, Employment

An update from our very own Ivan Osorio:

Sen. Arlen Specter (R-Penn.) is expected to announce this afternoon that he plans to vote against cloture on the so-called Employee Free Choice Act, according to Grover Norquist, president of Americans for Tax Reform, who was called by Specter’s office. He announced this at the Capital Research Center labor conference, at which I spoke on a panel this morning.

CongressDaily is also reporting the news.

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