Public Sector Labor Unions
Prior to the presidency of John Kennedy, there were no government employee unions. He opened the flood gates by authorizing the formation of unions for federal employees. By today’s standards, JFK was very conservative, but labor had facilitated his election to the House and Senate; he had a soft spot for them. FDR scoffed at the idea of public sector unions when it was proposed. His response was that the spoils system had been reformed. Civil Service was a meritocracy with ample protection for those laboring in its service. My father was a civil servant for 29 years and 11 months. He made considerably less in compensation that he could have in the private sector, but he was a veteran of the great depression. He valued the benefits and security. That was the standard trade-off until the formation of unions.
Today, unions dominate the public sector. Half of all unionized labor in America today is on the public payroll. Union penetration of the private sector labor force continues to decline. In the public sector, it continues to increase.
The problem is that the concept of a public sector labor union is rooted in a basic contradiction. When a private sector employer negotiates with a union leader, the relationship is adversarial. The employer wants to keep as much of his/her profit margin as possible; the union wants to take more money and impose work rules. Each side has a hostage and they make an exchange. A politician negotiating with a union isn’t playing with his/her own money; both sides are playing on the taxpayers’ dime. The objective is to set wages at a level that won’t generate public outcry, and sneak in as many benefits as possible–because the fiscal impact of benefits is deferred and the details won’t make the paper, except maybe summarized in the last paragraph of the story. Totally unreported is the provision for automatic collection of dues, and the round trip made by more than half the money into the pockets of the politicians. That money goes into the campaign coffers of the folks who negotiated the deal and set the rules for protection of benefits. The aggregate contributions of public sector unions vastly exceed those of the dreaded Kochs.
Unlike my father, today’s civil servants make above market wages and enjoy benefits that are much more generous than he could have imagined–significantly greater that those enjoyed by folks working at comparable jobs in the private sector. It’s a great deal for public employees. Not so much for the rest of us.
The solution seems easy. Elect, appoint or hire somebody to negotiate with the unions whose mandate is protection of the interests of the folks paying the bill. End the practice of automatic collection of dues; let those employees who support the union and its political objectives elect to pay dues. Prohibit campaign contributions by unions to any politician who is part of the entity employing them.
The more proximate problem is pension obligations. Due to a failure to mandate adequate contributions, and the total failure to provide savings for gold plated retiree health care benefits, there is a huge shortfall. That shortfall has been exacerbated by faulty underwriting. Private sector pension plans must project investment returns at the AA bond rate. The government excluded itself from that requirement. In order to minimize the contribution level, most public plans are projecting returns of 7- 8% on invested capital. The resulting problem was anticipated by the participants in the corrupt bargain. In most jurisdictions, the pension plans get first call on tax receipts to make up the shortfalls–just below general obligation bonds in the capital stack. It’s written into many state constitutions. You, dear taxpayer, are on the hook.
How big is the problem? Looking at the plans covering all 22 million public sector employees; using realistic return assumptions (4%); and using realistic life expectancy assumptions, I say the shortfall (difference between projected collections and payouts) is AT LEAST $6,000,000,000,000 (that’s trillion).
How would we go about solving the problem? The first and most obvious thing to do is to end “spiking” (last minute promotions, using accrued sick leave and vacation to increase basis, etc.). End it for future retirees, and claw back benefits from those who spiked their way to higher payouts. What about the fact that we would be breaking a promise to retirees? The 13.5% income tax rate sold to us by Jerry Brown as a two year stopgap has been extended indefinitely. The 5 cent toll on the Bay Bridge was designated solely to pay off the bonds floated to pay for the bridge; it was supposed to end when the bonds were paid off. The toll is now $6.00 and going up. Government breaks promises all the time when it suits.
Next, force any entity issuing a municipal bond to provide an audited accounting of the state of its pension obligations, so that bond buyers know the true state of the entity’s financial condition. No jurisdiction should get away with going deeper into taxpayer subsidized debt until its financial house is in order.
Require public plans to use the same underwriting standards as private plans and force participants to make contributions that render the plan sustainable. If the participants find the deductions too onerous, they can elect to draw smaller pensions.
My most radical proposal would deal with double, triple, quadruple . . . dipping. With the exception of some high skill positions (i.e. judges) where a professional gives up significant earning potential to work in the public sector, there should be a limit on how much anyone can draw from the public purse in retirement and health care benefits. Set a pretty high number and index it for inflation. Then tax any benefits above that number at 100% and put the proceeds back into the fund from whence it came.
I think there is going to be hell to pay when the taxpayers find out how much of their money is going to be diverted from the services they think they are paying for into the pockets of retired civil servants, many of whom will have moved away from the jurisdictions paying them. Better to face the problem now, before it gets even bigger.