Unions, Politics, and Honesty
A friend asked me today why there seems to be relatively little emphasis on a peculiar distinction made in Gov. Walker’s public union reform proposal. Specifically, while the proposal disallows the unions to collectively bargain to increase wages, it would still let them collectively bargain to increase benefits, i.e., health care, vacation and sick pay, and, of course, pensions. (Gov. Scott Walker’s proposal is here, and Ezra Klein does a fair enough job explaining it.) It strikes me as very odd that Walker took this approach rather than the opposite—that is, rather than killing collective bargaining on benefits, leaving wages on the table for negotiation. Wages are easy to quantify. You give workers pay raises, and you have to make it work with this year’s budget. Moreover, most states have balanced budget requirements imposed by their constitutions. In short, there’s little room for mischief when it comes to negotiating for wages.
Benefits, however, is a much more vexing issue, because it’s so much easier politically for the government to increase benefits by tucking the liabilities away in future budget projections and investment portfolios. As a result, “future” compensation is nearly limitless when it comes to government accounting: if the funds aren’t there presently, they can kick the can down the road to future elected officials and taxpayers. Unions realize this, of course, and put pressure on government employers for generous benefits packages. This helps explain why public employees have such generous benefits packages, even if by some accounts their actual wages might track slightly below the private sector. According to Forbes, for example,
NYC socked away $20,000 per employee last year for pension benefits. Since 2000 its pension funding bill has risen ninefold, from $615 million to $5.6 billion in 2008. That’s more than the city spends on transport, health care, parks, libraries, museums and City University of New York combined, says the Citizens Budget Commission.
[Update: There’s also this from Robert Costrell, via Avik Roy: “The average Milwaukee public-school teacher salary is $56,500, but with benefits the total package is $100,005, according to the manager of financial planning for Milwaukee public schools.”]
Realizing this phenomenon, some state constitutions require that future liabilities must first be subjected to referendum. California is one such state. However, as you’ll see from my analysis of a recent California Court of Appeal decision, this state’s courts have long employed judicial sleight of hand to avoid the effect of these constitutional restraints. Unfunded pensions, the court held, are not really a “liability.” Instead, they are “an actuarial estimate projecting the impact of a change in a benefit plan.” In this way, the taxpayers’ constitutional protections on runaway unfunded pension liabilities have yielded to the government accounting tricks and judicial linguistic machinations. Thus, California’s public sector unions have been effectively exempt from obtaining taxpayer approval for pension increases and other benefits, even while those packages are crippling the state’s economy.
Specifically, San Diego’s pensions are facing mortal danger. Vlad Kogan provides a fair assessment of the fiscal realities of public employees’ defined benefit pensions. Kogan argues that, taking the long view, there really is no difference between defined benefit and defined contribution pensions: in good times, the taxpayer will contribute less to pensions; in bad times, the taxpayer will feel the pinch. Except, it’s more than just a pinch. Kogan does the math, and reveals just how costly the defined benefit plans are: public employee pensions, currently accounting for more than 40% of San Diego’s total payroll, will climb to a dizzying 55% by the mid 2020s. In theory, things will level out. In reality, however, San Diego may not hold out long enough to see that happen:
As we try to learn our lessons from the Great Recession, policy makers might well decide that the pinch put to taxpayers by taking the “long view” approach in defined benefit pensions is simply too destructive and too inequitable. With public sector unions standing guard, however, policy becomes frozen in time, and policy experiments only ever move one way: in favor of public sector unions at the expense of everyone else.
Politics proves again and again that democracy is a very bad accountant. The Economist explains how the seldom discussed concept and calculation of discount rates contributes to the inscrutability of what the taxpayers’ true liability is for public employee pensions. In Britain, for example, using a conservative discount rate indicates a liability up to 85% of GDP. The Economist concludes that if the whole picture of public employee compensation—salary, health care, benefits, and pension—were revealed to the public in straightforward terms, taxpayers may demand reform.
But this problem of political dishonesty in public union political bargaining could not be expressed any better than New Jersey Governor Chris Christie at his speech at the American Enterprise Institute:
You can imagine how that was received by 7,500 firefighters. As I walked into the room and was introduced. I was booed lustily. I made my way up to the stage, they booed some more. I got to the microphone, they booed some more. So I said, come on you can do better than that, and they did! They did. And then I said to them – I took away the prepared notes I had for the speech – I actually took them off of the podium, crumpled them up and threw them on the ground, so they could see that I would. And I said, here’s the deal: I understand you’re angry, and I understand you’re frustrated, and I understand you feel deceived and betrayed. And the reason you feel all the things is because you have been deceived and you have been betrayed. And for twenty years, governors have come into this room and lied to you. Promised you benefits that they had no way of paying for, making promises they knew they couldn’t keep, and just hoping that they wouldn’t be the man or women left holding the bag. I understand why you feel angry and betrayed and deceived by those people. Here’s what I don’t understand. Why are you booing the first guy who came in here and told you the truth? See, there is no political advantage to me coming into that room and telling the truth. The way we used to think about politics and unfortunately the way I fear they’re thinking about politics still in Washington DC. See, the old playbook says lie, deceive, obfuscate and make it to the next election. You know, there’s a study that says by 2020, New Jersey is one of eleven states whose pension could be bankrupt. And when I told a friend of mine about that study, he said to me, well wait. By 2020, you won’t be governor. What the hell do you care? That’s the way politics has been practiced in our country for too long and practiced in New Jersey for too long. So I said to those firefighters, you may hate me now. But fifteen years from now, when you have a pension to collect because of what I did, you’ll be looking for my address on the internet so you can send me a thank you note.
One last point about the current debate over public sector unions. These and the many other criticisms of public sector unions are not new. Yet, instead of meaningful responses to these arguments or explanations of their abuses, public union supporters have offered no direct justifications for maintaining a regime that enables public sector unions to collectively bargain at less than arms’ length, in an anti-democratic process that pits unions against elected officials with a mix of political and soft economic objectives, while holding hostage the public who depends on the services they provide. The train of public sector union abuses, then, are not mere anecdotes, not mere loose ends to be tidied up with corrective legislation. They are symptoms of a systemic problem. It’s a feature, not a bug. Public union supporters thus send a strong message by their failure to acknowledge these systemic problems, their refusal to come to the table to discuss solutions, their stubborn insistence on continuing to hand out lavish benefit packages at the expense of future taxpayers, and, in the case of Wisconsin Democrats, their fleeing the state to prevent discussion or reform of serious issues relating to the public welfare. That message is, sadly, that Democrats are politically invested in unions, and will not countenance any reforms that will dilute the power of that political stronghold. The support for public union collective bargaining cannot be explained by anything other than dirty politics.