government employee unions

Massachusetts’ Collective Bargaining Law: A Worry for the Obama Administration?

by Ivan Osorio on July 13, 2011

in Economy, Employment, Labor, Politics as Usual

It’s not easy being a governor or state legislator these days. With states facing deep budget deficits, state lawmakers around the nation are working to close their budget gaps by tackling one of the biggest costs they face: government employee compensation. As we saw in Wisconsin (and to a lesser extent in Ohio), Republican lawmakers who take on the government employee union lobby can expect an all-out backlash from it.

But it’s not just Republicans. Some Democratic state elected officials are also trying to close their own states’ budget gaps. While public employee unions have not been as vocal in their opposition to Blue Team-proposed cuts, Democrats depend on campaign support from unions in a way Republicans do not, so alienating those unions could prove costly politically — at least in theory.

That’s difficult enough, but now it appears that Massachusetts Governor Deval Patrick, a Democrat, recently had to deal with the Obama administration on this issue. The Boston Globe reported this week:

The White House took the unusual step this spring of calling Governor Deval Patrick to discuss his plan to curb the collective bargaining rights of public employees, an indication that the Obama administration may have been concerned about the potential for national political fallout.

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Chicago Mayor Emanuel Gives Unions a Choice: Concessions or Layoffs

by Ivan Osorio on July 1, 2011 · 1 comment

in Economy, Employment, Labor, Regulation

Leaders of government employee unions must be feeling lonely these days. Across the country, Democratic state and local elected officials — traditional union allies — are asking their public employee unions for concessions, in order to bring their governments’ finances under control.

This week, Chicago Mayor Rahm Emanuel, a Democrat, presented the unions representing city employees with a tough choice: Agree to cost-saving concessions or endure layoffs. Emanuel said he had identified the first 625 employees who would face layoffs if the unions do not agree to concessions.

This trend could continue if voters reward those politicians who impose budget discipline, taking on entrenched union interests. As William Kovacs and I note in the new issue of Labor Watch, economic reality is finally winning out over politics in some areas.

To gain some measure of control over their runaway public ?nances, Democrat-controlled states are acknowledging that they will have to make tough decisions that Big Labor will hate. Despite accepting millions of dollars in union campaign contributions, some Democratic of? ceholders are ignoring Big Labor’s demands. They are seeking budget cuts and union concessions.

“Public unions have a symbiotic relationship with the Democratic Party,“ observes Manhattan Institute senior fellow Daniel DiSalvo. “They provide essential campaign dollars and boots on the ground to Democratic candidates. … Therefore, most efforts to alter collective bargaining rules, to give government managers greater autonomy to innovate, or to reduce the costs of compensation, are likely to come from Republicans.”

However, DiSalvo has noticed that larger changes are taking place. Writing in  The Washington Examiner, he argues that, “[T]here are outside forces that may make reform inevitable. Global competition and technological innovation will demand it. That is if the huge unfunded liabilities for pensions and health care don’t catch up with state and local governments ?rst.”

For more on the divisions between Democrats and government employee unions, see here.

In Wisconsin, Smaller Class Sizes through Fiscal Restraint

by Ivan Osorio on June 30, 2011

in Economy, Employment, Labor

Of the various hyperbolic leftist talking points against the recently enacted Wisconsin collective bargaining law, the “war on teachers” was easily the most shrill, dumb, and tiresome. It was also flat wrong.

Now a similar collective bargaining reform by the Kaukauna Area School District (part of the Appleton metro area) is projected to shift the District’s budget from a substantial deficit to a large surplus. The Appleton Post Crescent reports:

As changes to collective bargaining powers for public workers take effect today, the Kaukauna Area School District is poised to swing from a projected $400,000 budget shortfall next year to a $1.5 million surplus due to health care and retirement savings.

The Kaukauna School Board approved changes Monday to its employee handbook that require staff to cover 12.6 percent of their health insurance and to contribute 5.8 percent of their wages to the state’s pension system, in accordance with the new collective bargaining law, commonly known as Act 10.

“These impacts will allow the district to hire additional teachers (and) reduce projected class sizes,” School Board President Todd Arnoldussen wrote in a statement Monday.

Teachers unions have been advocating reduced class sizes for years. Whatever the merit of smaller classes — and there is no universally accepted definition of what constitutes an “ideal” classroom headcount — they would require the hiring of more teachers, resulting in more dues-paying union members.

Now Kaukauna is poised to give the unions that, in exchange for some modest increases to their health insurance and pensions. Yet I  doubt the state’s NEA affiliate will be celebrating (hat tip: Iain Murray).

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

New CBO Pension Report: Underfunding Could Be Higher

by Ivan Osorio on May 6, 2011

in Bailout Watch, Economy, Labor

That state and local governments  face serious pension funding problems isn’t a particularly controversial contention. However, the question of how much they’re underfunded by is much more contentious.

Last week, the Pew Center on the States released a report that estimates the nation’s total public pension underfunding at $1.26 trillion, based on the discount rate which  the Government Accounting Standards Board (GASB) allows fund managers to use in order to determine their level of contributions needed to meet future obligations. The Pew report is significant in that it acknowledges the arguments that the GASB-based estimate may be too low.

Now a new report by the Congressional Budget Office (CBO) follows suit, and goes further. It discusses in some detail the “fair-value approach” advocated by some GASB critics, and estimates what total pension underfunding would be using lower discount rates.

  • For assets, the fair value is what an investor would be willing to pay for them—that is, the current market value (or an estimate when market values are unavailable); it is not the averaged, or smoothed, market values that are reported under GASB guidelines.
  • For pension liabilities, the fair value can be thought of as what a private insurance company operating in a competitive market would charge to assume responsibility for those obligations.

In the case of state and local pension plans, the discount rate for future benefit payments using the fair-value approach is lower—and, therefore, the estimated present value of those payments is higher—than under the GASB approach. Under the fair-value approach, future cash flows are discounted at a rate that reflects their risk characteristics. Hence, for pension liabilities, the discount rate reflects the fact that the cash flows associated with accrued liabilities are fixed and carry little risk; it is very unlikely that the liabilities will not be honored. By contrast, under the GASB approach, the discount rate used for liabilities reflects the greater risk associated with pension funds’ assets. Under the fair-value approach, one way to approximate the discount rate applied to future benefit payments is by using the interest rate on municipal securities adjusted to remove the effect of tax deductibility): In 2010, the discount rate would have been about half as large as the median discount rate of 8 percent under the GASB guidelines. (For additional discussion of discount rates, see Box 1 on page 6.)

A study published last year that examined the sensitivity of estimates of underfunding to discount rates for pension plans in the Public Fund Survey illustrates the large difference between the GASB and fair-value approaches. Unfunded liabilities in 2009 amount to about $0.7 trillion when liabilities are discounted at 8 percent but total $2.2 trillion when liabilities are discounted at 5 percent and $2.9 trillion when they are discounted at 4 percent (see Table 1). Those unfunded liabilities, as calculated on a fair-value basis, indicate funded ratios of roughly 55 percent and less than 50 percent, respectively.

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Wisconsin Judge’s Strange Ruling Blocking Limits on Collective Bargaining Surprises Legal Observers

by Hans Bader on March 25, 2011 · 2 comments

in Labor, Legal

Wisconsin legal observers were “surprised last week when Madison-based judge Maryann Sumi issued a temporary restraining order blocking implementation of Gov. Scott Walker’s bill to limit public-sector collective bargaining.” A law professor was “astonished” by the legally-baseless ruling, which didn’t even bother to “address the relevant laws and rules that demonstrate that what the legislature did was proper.”

The judge’s decision made no legal or logical sense, but did make political sense: the judge has to run for reelection in a liberal area, and her own son was a union organizer. Her son is a liberal political operative who also happens to be a former lead field manager with the AFL-CIO and data manager for the SEIU State Council. Moreover, the judge’s husband is a campaign donor to three of the Democratic lawmakers who fled the state to block the passage of the collective bargaining law, as well as a donor to Gov. Walker’s opponent.

Judges in Wisconsin have to run for reelection, and this judge is elected in liberal Dane County, where the new collective bargaining law was resoundingly unpopular, and the new governor lost by a wide margin even while winning easily statewide.

There was little legal basis for the judge’s ruling. The Senate Chief Clerk and non-partisan legislative attorneys signed off on the legislation being consistent with the open-meetings law.

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Did Wisconsin Police Violate the First Amendment through Selective Enforcement of Limits on Protests?

by Hans Bader on March 3, 2011 · 1 comment

in Features, Labor, Legal, Personal Liberty, Politics as Usual, Sanctimony

Post image for Did Wisconsin Police Violate the First Amendment through Selective Enforcement of Limits on Protests?

Ordinarily, protesters who tried to occupy the Wisconsin Capitol Building would be swiftly arrested and removed. But this weekend, police in Madison, Wisconsin, not only allowed pro-union protesters to stay and sleep in the state Capitol Building, they joined them.

Wisconsin union supporters applauded this lawlessness. One exulted, “Police have just announced to the crowds inside the occupied State Capitol of Wisconsin: ‘We have been ordered by the legislature to kick you all out at 4:00 today. But we know what’s right from wrong. We will not be kicking anyone out, in fact, we will be sleeping here with you!’ Unreal.”  (Days later, the police finally told the protesters to leave the Capitol Building, but “didn’t evict“ them at that time, and protesters were still camped out in the Capitol Building on the morning of March 1, with their garbage and trash littering the building and the surrounding areas. By the time the police finally took grudging action to limit the protesters’ access to the building, it was during business hours — when the building has traditionally been open to the public. So a union lawyer then promptly got a temporary restraining order that, with little explanation, forced Wisconsin officials to reopen the building to the public during business hours, thus making it harder for them to clean up the building and prevent future occupations.)

This foot-dragging by police and their selective enforcement of the law was a violation of federal court rulings, like Dwares v. City of New York (1992), that require police to enforce the law in a viewpoint neutral manner. In Dwares, police were sued for refusing to arrest people who attacked flag-burners because they disagreed with the flag-burners’ message — even though police ordinarily enforce laws against assault.

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Wisconsin Union Backers Defame Virginia and Spread Bogus Statistics

by Hans Bader on February 26, 2011 · 1 comment

in Features, Labor, Politics as Usual, Regulation, Zeitgeist

Post image for Wisconsin Union Backers Defame Virginia and Spread Bogus Statistics

Virginia schools have better-than-average test scores. Virginia obviously doesn’t rank an abysmal 44th in the nation on SATs and ACTs, as supporters of Wisconsin government-employee unions keep falsely claiming. They’re making that claim up because Virginia bans collective bargaining by government employees, and Wisconsin, which currently mandates collective bargaining in government agencies, is considering proposals by its newly-elected conservative governor to bar such bargaining in areas like pensions, which frequently result in government costs being passed on to future generations.

In 2009, Virginia ranked in the middle of states on the ACT and SAT, and in 2010, it actually outranked Wisconsin on the ACT (12th vs. 17th in “average composite score“). The reason it doesn’t rank higher on the SAT is because so many of its students take the test – including marginal students who wouldn’t even take them in another state. (Wisconsin boasts a higher average SAT score than Virginia partly because only “four percent” of Wisconsin students took the SAT, compared to “67 percent” in Virginia. Virginia’s lower average SAT score is a function of a larger pool, not dumb students or bad schools, as PolitiFact pointed out in debunking the false claim that Virginia ranks 44th.)

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No, Wisconsin’s Budget Deficit Wasn’t “Manufactured” by Walker and the GOP

by Hans Bader on February 23, 2011 · 2 comments

in Economy, Employment, Labor, Regulation

Post image for No, Wisconsin’s Budget Deficit Wasn’t “Manufactured” by Walker and the GOP

Wisconsin is one of the most heavily taxed states in the country, and its government employees are paid much better than the state’s taxpayers. Like many states, it’s facing a substantial budget deficit. But when the state’s newly elected Republican governor, Scott Walker, attempted to place reasonable limits on government-employee pay and collective bargaining, liberal commentators such as Rachel Maddow falsely claimed that the state’s budget crisis was manufactured, and that Wisconsin actually had a projected budget surplus.

This claim has now been debunked by the Milwaukee Journal-Sentinel, which endorsed Obama in 2008 and John Kerry in 2004: “Our conclusion: Maddow and the others are wrong. There is, indeed, a projected deficit that required attention, and Walker and GOP lawmakers did not create it.” Maddow blamed the state’s current deficit on business tax breaks supported by the governor, but those cuts are a tiny drop in the bucket compared to the state’s overall budget; and as the Journal-Sentinel noted, “the cuts are not even in effect yet, so they cannot be part of the current problem.”

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Obama Instigating Disruptive Wisconsin Protests to Protect Union Privileges

by Hans Bader on February 18, 2011 · 5 comments

in Economy, Employment, Labor

In the Washington Examiner today, I discuss how Obama and his allies are helping orchestrate the disruptive Wisconsin protests that have shut down many of its schools. The Democrats in the Wisconsin State Senate have fled the state to deprive the legislature of a quorum needed to pass fiscal reforms backed by Wisconsin’s conservative governor that would reduce the privileges of the state’s public-employee unions.

As The Wall Street Journal notes, those reforms would not only reduce gold-plated employee benefits, but also curb the entrenched power of liberal lawmakers by ending the practice of automatically withdrawing money from public-employee paychecks to finance the government-employee unions, which make almost all of their political donations to liberals:

Unions are treating these reforms as Armageddon because they’ve owned the Wisconsin legislature for years and the changes would reduce their dominance. Under Governor Walker’s proposal, the government also would no longer collect union dues from paychecks and then send that money to the unions. Instead, unions would be responsible for their own collection regimes. The bill would also require unions to be recertified annually by a majority of all members. Imagine that: More accountability inside unions.

As David Freddoso notes at the Washington Examiner, Wisconsin government employees are better paid than the state’s taxpayers. At the Daily Caller, CEI’s Ryan Young notes that there are political risks to well-paid public-employees effectively shutting down the government to preserve their perks. On the other hand, liberal bloggers and most liberal journalists seem to be backing the protesters, despite their inflammatory rhetoric (like depicting the governor as Hitler or invoking the words of Lincoln’s assassin) and defiance of a democratically-elected governor and legislature. One exception is The Washington Post‘s Charles Lane, who worries about steadily-rising government-employee pay crowding out other needs, and says that “it’s not progressive when employee compensation takes finite resources away from Medicaid, parks, roads and libraries.”

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.

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