public sector unions

Public Pensions Fuel Government Growth

by Ivan Osorio on January 4, 2012 · 1 comment

in Bailout Watch, Economy, Employment, Labor

The straitened finances afflicting state and local governments across the nation have brought unprecedented scrutiny to government employees’ compensation, particularly pensions. As pro-market critics have pointed out how generous many public pensions are, government union representatives have pleaded poverty in response.

Today in The Wall Street Journal, Andrew Biggs of the American Enterprise Institute and Jason Richwine of The Heritage Foundation, say, “Not so” to such pleas of poverty. They do so by comparing defined benefit pensions to defined contribution retirement plans, such as 401(k) accounts.

Complex formulas obscure the fact that public pensions typically are much more generous than 401(k)s, making the situation ripe for misleading claims.

A case in point is the Illinois Teachers Retirement System (TRS), which insists that, because Illinois teachers don’t participate in Social Security, the average teacher’s pension of almost $43,000 “cannot qualify as ‘too generous.’” One might assume from such a statement that the typical Illinois teacher who retires this year after a full career will collect $43,000 per year. Not so. That average figure reflects the pensions of employees who retired years or decades ago, as well as individuals who worked only part of their careers in public schools.

The 2010 annual report for the TRS actually shows that the average teacher who retires today after 30 to 34 years of service had final earnings of $84,466 and collects a pension of $60,756 a year, plus annual cost-of-living adjustments, providing an income higher than 95% of retirees in Illinois.

These sums — and the strain they put on government finances — need to inform the debate over public pensions. But reformers need also to keep in mind the political implications of overly generous government pensions.

Generous pensions allow union-friendly politicians to satisfy their labor supporters’ demands while pushing those demands’ costs well into the future. Taxpayer resistance to increased spending is less powerful when politicians hide the spending through years-long delay. And that delay is one of the tools that have allowed government employee unions to become the permanent lobby for ever expanding government that they are today.

For more on pensions, see here.

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.

CEI Podcast for June 29, 2011: Stealing You Blind

by Ryan Young on June 29, 2011

in Economy, Podcast, Politics as Usual

Have a listen here.

Vice President for Strategy Iain Murray‘s new book is Stealing You Blind: How Government Fat Cats Are Getting Rich Off of You. He explains why the Washington, D.C., area is the richest in the country, tells the story of the small-town city manager with a tax-free $1 million-per-year pension, and offers some reforms that could bring government down to a more appropriate size.

Official Time: Union Activity on the Taxpayers’ Dime

by Ivan Osorio on June 2, 2011

in Employment, Labor

Government Executive summarizes the Office of Personnel Management’s report on the use of official time, whereby unionized federal employees carry out union business while being paid by the government — i.e. taxpayers. The House Oversight Committee’s Subcommittee on the Federal Workforce, Postal Service, and Labor Policy yesterday held a hearing on the topic, where CEI Labor Policy Counsel F. Vincent Vernuccio testified.

The report, the subject of a Wednesday hearing on Capitol Hill, found that federal employees spent nearly 3 million hours of official time on union activities in 2009 at a cost of $129 million to taxpayers, an increase of $8 million from fiscal 2008. The number of official time hours used per bargaining unit employee on union matters during fiscal 2009, however, decreased slightly from fiscal 2008. “Official time costs represented less than two-tenths of 1 percent of the civilian personnel budget for federal civil service bargaining unit employees,” Timothy Curry, deputy associate director of partnership and labor relations at OPM, testified before the House Oversight and Government Reform Subcommittee on the Federal Workforce, Postal Service and Labor Policy.

“The dollars spent on official time are minuscule compared to the money saved by having a mechanism in place to resolve disputes in a nonadversarial way and promote cooperative labor-management efforts to increase productivity, improve customer service and reduce the costs of doing business,” National Treasury Employees Union President Colleen Kelley said in submitted testimony.

Both the above arguments avoid the question of why taxpayers should subsidize union activities at all.

Curry’s focus on official time’s share of the budget is a moot point. If an activity is not a government function, it shouldn’t get government funding, no matter how relatively small its cost.

Kelley ignores the fact that the federal government already has “a mechanism in place to resolve disputes in a nonadversarial way” that doesn’t require unionization: the civil service system.

So why does this subsidy of union activity go on?

Part of the problem stems from inconsistent reporting. Although employees have used official time for certain union activities for decades, OPM has published reports tracking hours and costs regularly only since fiscal 2002. OPM has worked with agencies to collect the data, but the fiscal 2009 data was just released earlier this month after congressional requests. Curry said the fiscal 2010 report would be available by the end of the year. Ross plans to introduce a bill that would require OPM to submit an annual report on official time no later than March of each calendar year.

Indeed, as CEI’s F. Vincent Vernuccio, who testified at yesterday’s hearing noted:

OPM’s acknowledgment of its not being required to publish the report clearly indicates that at the agency could  discontinue it at its discretion. The need for the report is twofold.

First, taxpayers should be able to know how many of their tax dollars are going to fund official time.

Second, required reporting of official time will allow federal employees to hold their agencies accountable. As OPM rightly notes, “Annual reporting on official time was initiated by OPM to reinforce accountability on the part of both labor and management.”

Congress should also specify the time and manner of the official time report’s publication.

For Vernuccio’s full testimony, see here.

Activist Judge Strikes Down Wisconsin Collective Bargaining Law — For Now

by Ivan Osorio on May 26, 2011

in Labor, Politics as Usual

Government employee unions and their allies have tried just about everything to stop the efforts by Wisconsin Governor Scott Walker and Republicans in the legislature to curb their collective bargaining privileges. Senate Democrats fled the state. Union activists held loud protests for weeks in Madison.

Then, after GOP collective bargaining measure passed, unions and their allies set out to replace a state Supreme Court judge with one likely to strike down the collective bargaining law, to no avail.

Now a liberal activist judge has struck down the collective bargaining law. At first sight, this may seem like a major victory for Wisconsin’s unions, but in fact their quiver is running low.

As The Washington Examiner‘s Philip Klein notes, “The ruling is likely moot, as the issue is expected to be decided by the state’s Supreme Court anyway.” With incumbent Republican Judge David Prosser still on the Court, the union’s prospects there don’t look too bright. (Prosser’s Democrat challenger JoAnne Kloppenburg has until May 31 to decide if she wants to challenge the election result, but even if she does her odds are not good.)

The Politics of Public Pension Underfunding

by Ivan Osorio on May 23, 2011

in Economy, Employment, Labor

To date, the debate over public pensions has focused largely on accounting methods — how best to estimate the level of current funding needed to pay pension funds’ future obligations. That issue is crucial, but in the context of public policy, it needs to be understood in light of the political incentives that affect pensions.

It was good to see that topic discussed today at a panel debate on the underfunding of public pensions. The event, co-sponsored by the Manhattan Institute and the recently founded think tank E21 and held at the National Press Club, centered on the question of whether public pensions are in “crisis.” Andrew Biggs of the American Enterprise Institute and Josh Barro of the Manhattan Institute argued for the crisis scenario. Arguing the opposite case were Dean Baker of the Center for Economic and Policy Research and Elizabeth McNichol of the Center for Budget and Policy Priorities.

Interestingly, no one on the panel argued that public employee pensions face no problems at all. Baker and McNichol simply argued that the problems have been overstated and are relatively easily manageable. Yet this seemingly modest concession is significant.

During a discussion over compensation, everyone on the panel seemed to agree that back-loading of benefits — making them come due far in the future — is a problem. That creates a perverse incentive to shift costs onto future taxpayers, as Barro rightly noted.  Future taxpayers simply don’t have political clout today. Thus, the same public choice diffuse costs/concentrated benefits dynamic — which incentivizes politicians to transfer wealth from those who complain the least to those rent-seekers that lobbies the hardest — appears to create a ratchet effect toward ever increasing present-day benefits and unfunded future liabilities, when applied across time.

That seems like an intractable problem, but there is something that can be done: curb the political power of public sector unions by ending or seriously restricting government employee unions’ collective bargaining privileges. Government employee unions are the principal lobby for increasingly generous public employee compensation, and their ability to negotiate directly with government officials over the expenditure of government resources is a perk that no private party enjoys.

For more on public sector unions, see 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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Faulty Public Pension Accounting: A Problem too Big to Ignore

by Ivan Osorio on April 28, 2011

in Economy, Employment, Labor, Regulation

One reason the ongoing debate over collective bargaining for government employees has been so loud is that the stakes are so high — for unionized government employees on one side and for taxpayers on the other.

For years, public sector collective bargaining enabled government employee unions, especially at the state and local level, to aggressively lobby for generous compensation in exchange for political support for the politicians who grant such largess.

Those politicians, seeking to avoid taxpayer wrath today, deferred many of the costlier elements of that compensation well into the future, including pensions. To make matters worse, states underfunded those pensions for years, and the accounting methods they used hid the funding gaps.

Today, however, much as the budget crises affecting state government around the country has brought public attention to the bad bargain for taxpayers that is public sector collective bargaining, state pension accounting standards face considerable public scrutiny, from across the ideological spectrum.

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