government 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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Are Government Employee Unions Losing the Democrats?

by Ivan Osorio on December 10, 2010

in Economy, Labor, Regulation, Zeitgeist

Government employee unions have long been renowned as one of the Democratic Party’s most loyal and dedicated supporting constituencies. For years, Democratic politicians have supported public employee unions’ agenda of increased government spending, leading to more government jobs and thus more potential union members.

For teachers unions — which are among the most politically powerful government unions — Democrats have helped them resist popular school reform efforts that could threaten the government-school monopoly, including school choice and charter schools.

That was great deal for the unions and their political allies, but a dead weight on everybody else, as taxpayers funded a continually expanding government sector, while a growing number parents saw their children stuck in underperforming schools. Now cracks are finally starting to show in that alliance — and they may get wider in the near future.

It is perhaps no coincidence that some of the nation’s boldest education reformers have been Democrats. From outgoing Washington, D.C. Mayor Adrian Fenty to New York Mayor Michael Bloomberg (who was a Democrat before he re-registered Republican and is now an Independent), it is mayors in Democrat-controlled cities who have faced the most dire conditions in the schools they were elected to oversee.

Both Fenty  and Bloomberg saw the need for drastic action, thus their appointment and strong support for their respective school chancellors — Michelle Rhee and Joel Klein — both of whom pursued an aggressive reform agenda.

Now Los Angeles Mayor Antonio Villaraigosa, also a Democrat, has joined the pro-reform chorus. Not surprisingly, his city’s teachers union, United Teachers of Los Angeles (UTLA), wants no part of Villaraigosa’s reform efforts. Moreover, Villaraigosa himself has a teachers union background. To his credit, the mayor is striking back.  In a speech this week, Villaraigosa criticized the UTLA leadership in no uncertain terms:

Over the past five years, while partnering with students, parents and non-profits, business groups, higher education, charter organizations, school district leadership, elected board members and teachers, there has been one, unwavering roadblock to reform: UTLA union leadership.

While not the biggest problem facing our schools, they have consistently been the most powerful defenders of the status quo. I do not say this because of any animus towards unions. I deeply believe that teachers’ unions can and must be part of our efforts to transform our schools. Regrettably, they have yet to join us as we have forged ahead with a reform agenda.

By partnering with the Los Angeles School Board, we created the Public School Choice program that is now allowing non-profits, charters, teacher groups — anyone with a proven track record of success — to compete to run new or failing schools. By 2012, over 50 low-performing schools will be under new leadership, with a new chance for success.

UTLA leadership fought against this reform.

Partnering with the School Board and the charter school community, we doubled the number of charter schools in an effort to raise our test scores and alleviate overcrowding.

Partnering with the Parent Revolution, we successfully passed legislation here in Sacramento, empowering communities to shut down, reopen or takeover a failing school if a simple majority of parents petition to do so.

Working with LA Unified, I founded the Partnership for Los Angeles Schools to turn-around 21 of the lowest-performing schools.

And partnering with civil rights organizations and the ACLU, we filed a lawsuit to take a stand against the practice of seniority-based layoffs, which were disproportionately affecting our poorest schools and students of color.

At every step of the way, when Los Angeles was coming together to effect real change in our public schools, UTLA was there to fight against the change and slow the pace of reform.

Now let me pause to underscore the point once again that I come from an organizing background. I vociferously believe in the fundamental right for a worker to organize, to have a voice and a seat at the bargaining table. But union leaders need to take notice that it is their friends, the very people who have supported them and the people whom they have supported, who are carrying the torch of education reform and crying out for the unions to join them.

UTLA boss A.J. Duffy angrily dismissed Villaraigosa’s remarks, saying that, “Pointing fingers and laying blame does not help improve our schools.” Yet pointing fingers at those responsible for the dire state of public schools is what is needed.

Duffy’s reaction, while unfortunate, is not surprising. For he and other government union bosses to change course, the incentive structure under which the UTLA, and government employee unions in general, operate needs to change.

As the late president of  American Federation of Teachers, Albert Shanker, so honestly put it, “When school children start paying union dues, that’s when I’ll start representing the interests of school children.” Until they do, Villaraigosa’s call on UTLA leaders to drop their opposition to his administration’s reform efforts and join him in making L.A.’s public schools better is likely to continue falling on deaf ears.

Likewise, government employee unions exist to represent the interest of their members, not of taxpayers. And government employees benefit from the growth of government, so the interests of public sector unions and those of taxpayers are fundamentally at odds.

Adding to the problem is the fact that it is on union-friendly politicians’ interest to give the unions what they want, since — in the classic concentrated benefits/diffuse costs public-choice problem — they’re more likely to protest at being denied greater compensation than taxpayers are likely to protest seeing their taxes go up gradually. Former San Francisco Mayor Willie Brown, also a Democrat, recognized this, though unfortunately once he was safely out of office:

The deal used to be that civil servants were paid less than private sector workers in exchange for an understanding that they had job security for life. But we politicians — pushed by our friends in labor — gradually expanded pay and benefits . . . while keeping the job protections and layering on incredibly generous retirement packages.

In government, unionization is greater at the state and local levels. For years, state and local governments were able to sustain their unionized employees’ generous compensation packages, as long as their economies continued growing. But since the nation’s economy went south, states and localities are struggling, and state and local politicians — Democrat and Republican alike — must face this crisis.

Indeed, in New York, Governor-elect Andrew Cuomo — yes, also a Democrat — may be headed for a showdown with government employee unions over wages and pensions. The unions won’t like it, but the taxpaying public will. In that regard, I think left-leaning Mother Jones blogger Kevin Drum gets it right:

I sometimes wonder if [UTLA head A.J.] Duffy understands just how widely his union is loathed? Somebody should correct me in comments if I’m wrong, but as near as I can tell UTLA literally has no support anywhere from anybody that it doesn’t directly give money to. Everybody else hates them with a passion. That doesn’t mean Villaraigosa can win a big public battle with UTLA, of course, since they give lots of money to lots of people, but he might. If Villaraigosa plays his cards right, he’ll have about 90% of the city on his side. Pass the popcorn.

Indeed, this and other similar fights will be worth watching.

For more on public sector unions, 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.

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.

Public Sector Unions’ Heavy Burden on Taxpayers

by Ivan Osorio on January 5, 2010 · 2 comments

in Economy, Labor, Politics as Usual, Regulation

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

New Study on How Government Employee Unions Squeeze Public Budgets

by Ivan Osorio on September 28, 2009

in Economy, Features, Labor, Regulation, Zeitgeist

Remember the California budget debacle? Now it seems like not a month goes by without another state facing a budget crisis. Now it’s Michigan’s turn. Predictably, state politicians are trying to scare the public with talk of cutting funding for libraries and prisons, in order to make tax increases an easier sell. Also predictably, policy makers appear to be avoiding looking for budget savings where substantial ones could be realized: government payrolls. As The Detroit News points out:

Employee pay and benefits make up one of the biggest costs of state government. Michigan had 52,769 workers as of March and a state classified payroll of $4.73 billion for fiscal year 2007-08. When the auto industry was larger, Michiganians were among the top 20 states in per-capita income. But that income has declined to 11 percent below the national average. The state with the nation’s worst unemployment rate can no longer afford to pay above-average compensation. Michigan state workers earn 6 percent more than the national average in salary and benefits, according to the U.S. Bureau of Economic Analysis. Michigan private-sector workers make 29 percent less than the national average for state workers.

As in other states, government employee unions oppose cuts that would affect their members. All unions do this, but public sector unions are different in that they don’t have to fear putting their employer — government — out of business, so they can ratchet up demands, which are fulfilled at taxpayer expense, to a much greater extent than private sector unions generally are able to. The upward spiraling public sector pay and benefits that result from this can wreak havoc on public finances.

For an in-depth analysis of the effect of the widespread unionizaiton of government employees, see the new Cato Institute Policy Analysis, “Vallejo Con Dios: Why Public Sector Unionism Is a Bad Deal for Taxpayers and Representative Government,” co-authored by University of South Florida economics professor Don Bellante, David Denholm of the Public Service Research Foundation, and myself.