government employee unions

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.

Government Unions Buying More Power

by Vincent Vernuccio on October 25, 2010

in Labor

Yesterday The Washington Examiner showed how public sector unions are buying their power though campaign donations. In their excellent editorial “Public employee unions versus working Americans,” the Examiner contrasts the grassroots movement of the Tea Party with the big money interests of government employee unions. It also shows the hypocrisy of President Obama going after (with false allegations) so called shadowy, unnamed “foreign interests,” while much of the money on the left comes from unions fighting for larger and more expensive government at taxpayers’ expense.

With the 2010 midterm congressional election campaign entering its final week, the fundamental divide in American politics has rarely been defined with more raw clarity than it is now.

On the one side are voters representing a vibrant private sector that creates jobs, builds prosperity and throbs with opportunity. Here are found the Tea Party movement, most congressional Republicans and a few of their Democratic colleagues, millions of independent voters, Main Street and small-business associations, and, increasingly, seniors. The other side is led by government employee unions who take from the private sector to further enrich and empower themselves and their political allies, including President Obama, House Speaker Nancy Pelosi, Senate Majority Leader Harry Reid, and the Democratic majority that has controlled both chambers in Congress since 2007. The unions’ supporting cast includes radical Big Green environmentalists, trial lawyers, most precincts of the mainstream media, and college professors.

Obama and company have been on a demagogic spree in recent weeks, attacking the U.S. Chamber of Commerce and a host of shadowy, unnamed “foreign interests” for allegedly pumping millions of anonymous dollars into U.S. politics to buy the election. The charge is demonstrably false, but that doesn’t prevent its endless repetition. On Friday, however, we learned courtesy of the Wall Street Journal that the biggest political spending in 2010 is by the American Federation of State, County and Municipal Employees. AFSCME will have funneled an estimated $87.5 million into the campaign by Nov. 2, all of it going to Democrats and an amount far exceeding the chamber’s $75 million. More millions are being poured into Democratic campaign coffers by other public-sector unions. On Friday, for example, the National Education Association spent $500,000 on ads aimed at helping Democratic Rep. Joe Sestak defeat former Rep. Pat Toomey, the Republican in the Pennsylvania Senate contest.

But there is a fundamental problem here that FDR understood years ago and that AFSCME President Gerald McEntee inadvertently highlighted when he told the Journal: “We’re spending big. And we’re damn happy it’s big. And our members are damn happy it’s big — it’s their money.” Actually, it’s not simply “their money.” Every dollar paid to a unionized government worker was taxed away from somebody who earned it in the private sector. So when these unions spend millions to elect Democrats who will vote for bigger government, they are literally using money from the productive part of America to enable more government taxing and spending. FDR might well have had this inconvenient fact in mind when he wrote in 1937 that “meticulous attention should be paid to the special relationships and obligations of public servants to the public itself and to the Government … the process of collective bargaining, as usually understood, cannot be transplanted into the public service.”

The interests of government employee unions are inextricably opposed to the public interest. It’s time campaign finance law recognized this truth.

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.

“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.

Barron’s on the Dire State of Public Employee Pensions

by Ivan Osorio on March 16, 2010

in Bailout Watch, Economy, Labor

The current issue of Barron’s highlights the crushing burden that employee pensions are putting on state and local governments around the nation. The situation is so dire that some dismaying-enough estimates fail to capture the entire scope of the problem. Barron’s writer Jonathan R. Laing cites a Pew Center of on the States study that finds that, “eight states — Connecticut, Illinois, Kansas, Kentucky, Massachusetts, Oklahoma, Rhode Island and West Virginia — lack funding for more than a third of their pension liabilities. Thirteen others are less than 80% funded.” That sounds bad, but it is a relatively optimistic estimate! As Laing notes:

The size of the legacy-pension hole is a matter of debate. The Pew report puts it at $452 billion. But the survey captured only about 85% of the universe and relied mostly on midyear 2008 numbers, missing much of the impact of the vicious bear market of 2008 and early 2009. That lopped about $1 trillion from public pension-fund asset values, driving down their total holdings to around $2.7 trillion.

Other observers think the eventual bill due on state pension funds will be multiples of the Pew number. Hedge-fund manager Orin Kramer, who is also chairman of the badly underfunded New Jersey retirement system, insists the gap is at least $2 trillion, if assets were recorded at market value and other pension-accounting practices common in Corporate America were adopted.

Finance professors Robert Novy-Marx at the University of Chicago and Joshua Rauh of Northwestern University asserted in a recent paper that the funding gap for state pension plans alone might exceed $3 trillion, in part because state funds are using an unrealistic long-term annual investment return of 8% to compute the present value of future payments to retirees, as is permitted in government standards for pension-fund accounting.

This establishes a “false equivalence” between pension liabilities and the likely investment outcomes of state investment portfolios, which are increasingly taking on more risk by beefing up their exposure to stocks, private-equity deals, hedge funds and real estate. Using a much lower expected return — say, one at least partially based on the riskless rate of return on government securities — would both properly and dramatically boost the present value of the pensions’ liabilities while decreasing their likely ability to meet them. The academic pair, using modern portfolio theory, claim that state funds, as currently configured, have only a one-in-20 chance of meeting their obligations 15 years out.

Of course, 15 years out, the politicians who helped to perpetuate this debacle will likely be out of office — which gives them an incentive to back load benefits in the form of pensions. By the time the bill comes due, it’ll be somebody else’s problem. So, while union-friendly office holders can’t give their public employee union supporters everything they ask for today, tomorrow is a different matter.

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

Obama Names SEIU’s Stern to Deficit Commission

by Ivan Osorio on February 26, 2010 · 1 comment

in Economy, Employment, Labor, Politics as Usual

President Barack Obama has appointed Service Employees International Union (SEIU) President Andrew Stern to a new commission tasked with coming up with recommendations to help reduce the federal deficit. While disappointing, this is not surprising. Stern’s appointment is merely the culmination of a series of appointments by the Obama administration of individuals closely associated with SEIU to government posts.

These include Patrick Gaspard, a former vice president for politics and legislation for SEIU Local 1199, a giant New York health care workers union, who was named White House political director following Obama’s election, and SEIU Treasurer Anna Burger, who was named to Obama’s Economic Recovery Advisory Board. Then there’s former SEIU associate general counsel Craig Becker, whose nomination to the National Labor Relations Board failed in a Senate cloture vote.

Stern himself, according to White House visitor logs released in November, visited the White House at least 22 times in 2009, making him the most frequent visitor during that time (the Alliance for Worker Freedom has filed a request for an investigation of Stern for possible lobbying disclosure violations, including during those visits).

This access hasn’t come easy. SEIU has invested heavily in politics. In 2008, it was the seventh biggest campaign donor, with nearly all of its contributions going to Democrats, according the the Center for Responsive Politics. Stern told The Las Vegas Sun in May 2009: “We spent a fortune to elect Barack Obama — $60.7 million to be exact — and we’re proud of it.”

Coziness between the administration and a special interest aside, asking the head of a union that organizes public sector workers presents a clear conflict of interest, especially now that union members in the public sector sectors outnumber their private sector counterparts for the first time ever.  Would Stern be willing to reduce growth of the sector where his union is most likely to find new members? More likely are calls for higher taxes to fund more “public services” for SEIU to unionize. That also shouldn’t be surprising. Today, government employee unions constitute a permanent special interest lobby favoring the growth of government, one that is motivated, organized, and well-funded.

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

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

“Here’s a way of paying for things that’s not going to cost you anything.”

by Ivan Osorio on January 28, 2010

in Economy, Employment, Labor, Politics as Usual

Public employee unions, as I’ve noted previously, make up a permanent lobby for bigger government. Now they have a major victory. Oregonians who went to the polls just voted themselves higher taxes. The explanation shouldn’t be that surprising. As The Wall Street Journal notes:

[A] deluge of money. Local and national public employee unions bankrolled the “yes” campaign, with a $6.5 million blitz in TV and radio ads. That was $2 million more than the business community and taxpayer advocates raised. The cash helped the tax increase roll up a 71% margin in the liberal precincts in and around Portland, even as it lost in most of the rest of the state.

The union message was also as clever as it was disingenuous: All of these taxes will be paid by someone else, such as Wall Street bankers, out-of-state credit card companies, CEOs. Only the richest 2.5% will pay a little more in taxes, the unions also claimed.

An opponent of this tax increase put it well, in The New York Times:

“It was a pretty good offer the proponents were making,” Pat McCormick, a spokesman for the lead opposition group, Oregonians Against Job-Killing Taxes, said sarcastically. “Here’s a way of paying for things that’s not going to cost you anything.”

As Reason‘s Ron Bailey aptly observes, for government employee unions, class warfare pays. (Thanks to Julie Walsh.)

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

More Union Members now Work for Governments than for Businesses

by Ivan Osorio on January 26, 2010 · 3 comments

in Economy, Employment, Labor

For the first time in U.S. history, the majority of the country’s union members work for government, the Bureau of Labor Statistics reports. For the cause of limiting the size of government, the implications of this development are ominous. Because they depend on the growth of government to increase their membership over the long term, government employee unions function as a permanent lobby for bigger government — one that is organized, motivated and well funded. As Brian Johnson of the Alliance for Worker Freedom notes in The Washington Times:

There once was a day when working for the government meant a sacrifice for public service. Government employees didn’t face the vagaries of employment in the corporate sector, where jobs come and go, but in return government jobs didn’t come with the salaries and perks of the private sector, either.

Not anymore. The government unions want it all – high pay, stability and a growing work force. And they’re willing to use their growing political clout to get it. Public-sector unions ferociously lobby each level of government for increased spending and oppose tax reductions.

In Oregon, public employees unions spent almost $4 million supporting ballot initiatives to raise personal income and business taxes by $733 million. The Service Employee International Union (SEIU) spent millions in California campaigning for higher oil, gas and liquor taxes. In Arizona, the Arizona Education Association lobbied successfully against repealing a $250 million-a-year statewide property tax. Even in the conservative state of Alabama, the Alabama Education Association’s annual convention endorsed tax increases on businesses, cigarettes and soft drinks – while voting down measures supporting spending restrictions to combat the state’s budget shortfall.

And how great is unions’ involvement in politics? Six of the top 10 — and 12 of the top 20 — donors to political campaigns during from 1989 to the present are unions, according to the Center for Responsive Politics. That the American Federation of State, County & Municipal Employees (AFSCME) is the second overall donor shouldn’t be surprising. Unionization in government is greater at the state and local level, so AFSCME has the most to gain from government budget bloat.

Another top-10 heavy hitter is the Service Employees International Union, which is working to increase its presence in the public sector — which SEIU hopes will grow much larger through greater government involvement in health care. (Thanks to Iain Murray for the Opensecrets.org link.)

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

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

How Much Harm Do Teacher Unions Do?

by Ivan Osorio on October 14, 2009

in Labor, Politics as Usual, Regulation

Plenty, according to the new film, The Cartel. The film purports to show “educational system like we’ve never seen it before. Behind every dropout factory, we discover, lurks a powerful, entrenched, and self-serving cartel.” Trailer below.

In fact, the power of teachers unions is part of an even greater problem: the growing ranks of unionized government workers, a phenomenon that creates a permanent constituency favoring the growth of government — one that is well organized, motivated, and well funded.

For more on public sector unions, see the study, “Vallejo Con Dios: Why Public Sector Unionism Is a Bad Deal for Taxpayers and Limited Government.”

More on Public Sector Unions

by Ivan Osorio on October 14, 2009

in Economy, Labor, Politics as Usual, Regulation

Slate blogger Mickey Kaus explains how public sector unions are driving state and local governments to the brink of bankruptcy (via Nick Gillespie at Reason Hit & Run, via Glenn Reynolds at Instapundit):

The justification for public sector unionism is way weaker than that for private sector unionism. “[Government] workers are not extracting a share of the profits but rather a share of taxes,” as former N.Y. Liberal Party leader Alex Rose puts it. And the right to strike, in the hands of key public unions, approaches a blackmail power. But the political strength of the unions is such that even most Republicans, at the state and local level, are scared to question them. They gelded Arnold Schwarzenegger. You want to be next?

Kaus cites a Weekly Standard article by Fred Siegel and Dan DiSalvo, in which they explain the public choice dynamic that makes government employee unions especially powerful:

[W]ith the power of the public sector unions to drive election outcomes, they now sit on both sides of the bargaining table. Unlike private sector unions, the sheer number of workers represented is not the linchpin of their influence. Private sector unions have a natural adversary in the owners of the companies with whom they negotiate. But public sector unions have no such natural counterweight. They are a classic case of “client politics,” where an interest group’s concentrated efforts to secure rewards impose diffused costs on the mass of unorganized taxpayers.

And how bad can it get?

The combined power of the teachers and health care workers has made the New York state legislature a wholly owned subsidiary of the public sector unions. The law mandates that all new legislation be evaluated for its fiscal impact. In recent years those calculations were performed by an actuary named Jonathan Schwartz. In 2008, when Schwartz found that a piece of bipartisan legislation allowing city workers to retire early with full pension benefits would impose no new costs, the New York Times blew the whistle. Schwartz, who had been fired from a city job, worked not only for the state assembly but also, it turned out, for District Council 37 of the SEIU. When asked which other unions he had worked for, he replied, “How many unions are there?” His client list included the teachers, firefighters, detectives, correction officers, and bridge and tunnel officers. Not surprisingly New York State has the highest per-employee pension costs in the country.

For more on the strain that public sector unions place on government budgets — and on democratic government itself — see “Vallejo Con Dios: Why Public Sector Unionism Is a Bad Deal for Taxpayers and Representative Government.”

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