Public Pension Perversion

Usually it takes a national government to spend itself into a debt measured in the trillions. Yet it comes as little surprise that the same profligacy that pervades the corridors of federal power infects this country's 87,000 state, county and municipal governments and school districts. By 2013, the amount of retirement money promised to employees of these public entities will exceed cash on hand by more than a trillion dollars. - Public-sector Unions Bankrupting America, The Washington Times, April 23, 2010

The Bankrupting of America

We have a ruinous collaboration of elected officials and unionized public workers

May 21, 2010

Wall Street Journal - The American public feels it is drowning in red ink. It is dismayed and even outraged at the burgeoning national deficits, unbalanced state and local budgets, and accounting that often masks the extent of indebtedness. There is a mounting sense that taxpayers are being taken for an expensive ride by public-sector unions. The extraordinary benefits the unions have secured for their members are going to be harder and harder to pay.

The political backlash has energized the tea party activists, put incumbents at risk in both parties, and already elected fiscal conservatives such as Republican Gov. Chris Christie of New Jersey. Over the next fiscal year, the states are looking at deficits approaching hundreds of billions of dollars. The Center on Budget and Policy Priorities, a liberal think tank, estimates that this coming year alone states will face an aggregate shortfall of $180 billion. In some states the budget gap is more than 30%.

How did we get into such a mess? States have always had to cope with volatility in the size and composition of their populations. Now we have shrinking tax bases caused by recession and extra costs imposed on states to pay for Medicaid in the federal health-care program. The straw (well, more like an iron beam) that breaks the camel's back is the unfunded portions of state pension plans, health care and other retirement benefits promised to public-sector employees. And federal government assistance to states is falling—down by roughly half in the next fiscal year beginning Oct. 1.

It is galling for private-sector workers to see so many public-sector workers thriving because of the power their unions exercise.

Take California. Investigative journalist Steve Malanga points out in the City Journal that California's schoolteachers are the nation's highest paid; its prison guards can make six-figure salaries; many state workers retire at 55 with pensions that are higher than the base pay they got most of their working lives. All this when California endures an unemployment rate steeper than the nation's. It will get worse. There's an exodus of firms that want to escape California's high taxes, stifling regulations, and recurring budget crises. When Cisco CEO John Chambers says he will not build any more facilities in California you know the state is in trouble.

The business community and a growing portion of the public now understand the dynamics that discriminate against the private sector. Public unions organize voting campaigns for politicians who, on election, repay their benefactors by approving salaries and benefits for the public sector, irrespective of whether they are sustainable. And what is happening in California is happening in slower motion in the rest of the country. It's no doubt one of the reasons the Pew Research Center this year reported that support for labor unions generally has plummeted "amid growing public skepticism about unions' power and purpose."

In New York, public-service employees have received gold-plated perks for much of the 20th century, especially generous health-insurance benefits. Indeed, where once salaries were lower in the public sector, the salary gaps in the public and private sectors have disappeared or even reversed.

A Citizens Budget Commission report in 2005 showed that for most job categories in the greater New York City region, public-sector workers received higher hourly wages than private-sector workers. And according to a 2009 survey by the same group, this doesn't even count the money that New York City pays in full premiums for comprehensive health-insurance policies for workers and their families. Only 8% of workers in private firms enjoy that subsidy. In virtually all cases, the city also pays the full health-care premium costs for retirees and their spouses. And city pensions are "defined benefit" plans, which are more expensive since they guarantee specific benefits on retirement.

By contrast, private-sector workers in the survey were mostly in "defined contribution" plans, which means that, unlike their cushioned brethren in the public sector, they do not have a predetermined benefit at retirement. If New York City were to require its current workers to pay contributions toward health insurance equal to the amounts paid by the employees of local private-sector firms, the taxpayer savings would be $628 million a year. In New Jersey, Gov. Christie says government employee health benefits are 41% more expensive than those of the average Fortune 500 company.

What we suffer is a ruinously expensive collaboration between elected officials and unionized state and local workers, purchased with taxpayer money. "Scratch my back and I'll scratch yours."

No wonder the Service Employees International Union has become the nation's fastest-growing union: It represents government and health-care workers. Half of its 700,000 California members are government employees. More and more, it wins not on the picket line but at the negotiating table, where it backs up traditional strong-arming with political power. It spends vast amounts of money on initiatives that keep the government growing and the gravy flowing.

The state's teachers unions operate in a similar fashion—with the result that California's various municipalities, especially Los Angeles, face budget shortfalls in the hundreds of millions of dollars. California can no longer rely on a strong economy to support this munificence. Its unemployment rate of 12.5% runs several points higher than the national rate and its high-tech companies are choosing to expand elsewhere. Why stay in a state with such higher taxes and a cumbersome regulatory environment?

California is a horrible warning of how dreams can turn to dust. In most states, politicians face a contracting local economy and shortfalls in tax receipts. Naturally, they look to cut expenses but run into obstruction from politically powerful unions that represent state and local government employees, teachers and health-care workers who have themselves caused pension and health-care insurance costs to soar. It is not an accident that in framing the national stimulus program in 2009 Congress directed a stunning $275 billion of the $787 billion as grants to the states to support public-service employees in health care, education, etc.

The lopsided subsidies for pension and health costs are a large part of the fiscal crises at the state and local levels. The subsequent squeeze on education and infrastructure investment is undermining the very programs that have made it possible for our economy to grow.

Between New York and California, the projected deficits run about $40 billion—and that doesn't account for projected billions of dollars in the operating deficits in the states' mass transit systems or the multibillion-dollar unfunded liability in many of the state pension plans. New York would be badly hit because it is on the verge of being deprived of tax revenues by Washington's increased regulations on the financial industry, especially the hugely profitable, multitrillion-dollar market in derivatives—an industry that is critical to the economy of New York state and the country.

City government was developed to serve its citizens. Today the citizenry is working in large part to serve the government. It is always hard to shrink government spending. It is particularly difficult when public-sector unions have such a unique lever of pressure.

We have to escape this cycle or it will crush us. One way is to take labor negotiations out of the hands of vulnerable legislators and assign them to independent commissions. They would have a better shot at achieving a fair balance between appropriate salary increases and the revenues and services of local municipalities. The electorate won't swallow any more red ink.

America’s Public-Sector Unions are Bankrupting the States

June 24, 2010

Seeker Blog - A 2009 study by economists Robert Novy-Marx and Joshua Rauh, published in the Journal of Economic Perspectives, estimated that these government pensions are underfunded by $3.2 trillion, or $27,000 for every American household.

The fiscal damage done by the unions is fairly obvious if one examines the data on the public-collective-bargaining states such as California, New York, New Jersey and Hawaii.

The political rent-seeking is very simple: unions invest heavily to get friendly state politicians elected. Those politicians repay the unions with continuously increasing wages and benefits that are totally out of touch with the market.

The Cato Tax and Budget Bulletin has an up to date report dated March 2010 [PDF]. And do not miss the Capital Hill Briefing Are Unions Good for America? available as video or audio podcasts.

These unions have one purpose: to extract from taxpayers above market compensation for their members. This purpose is implemented via a suite of destructive policies all of which are designed to increase inefficiencies in government (which means more union members and bigger union budgets). Example union policies are blocking school choice, privatization, and free trade.

In Unions, the Rule of Law, and Political Rent Seeking, Armand Thieblot outlines the threat — a threat which has become especially troubling in the short history of the Obama administration.

Consider that there are no market constraints on the power of unions to award themselves an increasing share of the nations production. No business fails due to excessive costs, the obvious constraint on private-sector unions — the government just borrows more or expropriates more from taxpayers. Thieblot writes:

They do this as economic rent seekers— hoping to secure for themselves and their members rewards greater than the value society accords them in a free market. Second, they dishonor the very principles of the rule of law by engaging in a corrupt, symbiotic relationship with lawmakers. They do this as political rent seekers—hoping to secure rewards of their own choosing, independent of economic or market restraint.

Public employees salaries average 28% higher than private workers, and benefits are 70% higher.

This means that for every $1 in pay and benefits a private employee earned, a state or local government worker received $1.45.

This is all due to the compensation of union employees as non-union employees are compensated at about the same as the private sector. The WSJ editorial has a few shocking examples:

The Orange County Register reports that California has 3,000 retired teachers and school administrators, who stopped working as early as age 55, collecting at least $100,000 a year in pensions for the rest of their lives.

Illinois’s pension obligations are so costly the state had to issue $3.5 billion of bonds merely to meet its mandatory contribution to the worker retirement program, which faces $85 billion, or three years of state tax revenues, in unfunded liabilities. Near-bankrupt New Jersey would have to pay $7 billion a year if it properly accounted for its pension and health benefits.

Wouldn’t you like to be able to retire and rehire?

California, Nevada New Jersey and Ohio all allow double dipping, which lets government workers retire in their 50s and then work another full-time job while collecting retirement checks. In Ohio, police, firefighters and teachers can retire after 30 years on the job, collect a full benefit each year and go back to work full-time doing the same job. This is called retire and rehire.

As the Columbus Dispatch reported last year: “Across the state, Ohio’s State Teachers Retirement System paid out more than $741 million in pension benefits last school year to 15,857 faculty and staff members who were still working for school systems and building up a second retirement plan.” Some teachers can earn nearly $200,000 a year in pensions and salaries.

One last fact: 70% of the 40 states running deficits would have a balanced budgets but for the raid on the taxpayers by the unions. The political reality of Obama’s “Stimulus Package” is that a big portion of it went to state and local governments to pay the inflated wages of public-sector employees. This means that taxpayers in well-governed states like Texas are paying the excessive wages of California employees. The WSJ editorial closed with this:

So if your state is broke, this is a major reason. Eventually, governors, state legislators and city council members are going to have to decide whether protecting America’s privileged class of government workers is a higher priority than funding such core functions of government as public safety. Something has to give. It’s time to close the biggest pay gap in America.