Public Employee Unions - Don't read if you pay taxes in California!

It's been a while since my last post, I wanted to update you on what I've been working on.  Last semester I one of my assignments was a research paper.  For a couple of reasons, I decided to dive into public sector unions.  First, there is a looming budget crisis at the state and local levels due to union-negotiated employee benefits (such as pensions) and second, there are some fascinating aspects of how public unions negotiate with public bureaucrats.  Fascinating if you're not paying the bill that is.

When I think of unions, I have memories from school of ruthless factory owners negotiating with unions, who were fighting for the little guy.  Or I think of the baseball or football player unions fighting with ownership over how much each party gets of the pie.  Either way, you have hardball negotiating sessions in smoke-filled rooms lasting deep into the night to pound out an agreement.  The owners are fighting to keep their profits and the unions are fighting for better pay, benefits and working conditions.

The story changes when you look at public sector unions.  The unions aren't negotiating with an owner, but a bureaucrat or an elected official.  That official isn't fighting to keep his profits; there are no profits or owners in the public sector. 

What are that official's motivations when negotiating?  Obviously he doesn't want to give away the farm or blow out the budget, as he'll be publicly flogged.  But there's another factor at play.  That union leader across the table can deliver him a lot of votes and dollars to keep him in office.  So he's got forces pulling both ways, one to limit pay to keep taxpayers happy, but another, to give the union what they want in exchange for their support.  Unlike an owner, who gets richer by limiting employee costs, the official can get re-elected by expanding employee costs, as long as he can keep the general taxpayer unaware (which isn't that hard to do). 

However, the role public unions play vary from state to state.  Some states mandate collective bargaining with public sector unions, meaning that pay and benefits are always negotiated by the union.  Other states ban collective bargaining, meaning that pay and benefits are decided individually, just as they are for most private, non-unionized, employees.

The purpose of my research was to compare how these laws affect public employee pay.  I chose two states on opposite ends of the spectrum, California and North Carolina, and compared how much their employees get paid.  California mandates collective bargaining and has high unionization rates among public employees.  North Carolina bans collective bargaining and has low unionization. 

Here are the highlights of my research.  You can read the full paper here

  • Holy Sunshine State!  I should've been a firefighter in California!  I'd be making $200k in salary, and looking at retirement at 50 years old with a yearly pension of $180k per year!  Plus full health coverage.  Alas, I'm not the first person to realize this, and people literally camp out at the fire station for a chance to just file an application for a firefighter job.  Oakland recently opened up 23 positions in their fire department and had a measly 2,000 applicants.  Pushing and shoving ensued by those jockeying for position in line to get an application in.  Too bad for them, the line didn't matter, what did was whether you were a friend or relative of a current firefighter.  Details here.
  • 401k?  What was I thinking?  I want a pension!  Over 12,000 public service retirees in California receive over $100k/year in pension payments.  On the high end you see pension payments in the $200s, and even one at over $500k.  Not bad, considering the retirement age is as early as 50.  How can that be?  Digging into the details reveals some fascinating machinations at play.  For one, state and local governments completely under-account for the costs of these pensions, meaning that the taxpayer bill doesn't look that high for current employees.  And even with that under-accounting, governments still don't fully fund the pension plans.  What does that mean?  There is a big bill coming down the pipe, i.e. there isn't nearly enough money in the pension funds to pay for the pension promises that have been made.  Also, public employees are good at rigging the pension calculation in their favor (called "pension spiking") - see this story on a California fire chief boosting his pension by $96k/year with some creative vacation buybacks.  You can see all 12,000 pension earners and how much they get here
  • Wonder why you pay so much tax and get so little in return?  California overpays their public employees to the tune of $49 billion per year, or almost $4k for every individual taxpayer in the state.  After accounting for general pay differences between California and North Carolina, state employees are overpaid by about 9%, but local government employees are overpaid by over 42%! 
  • Remember the town of Vallejo.  They recently filed bankruptcy due to their out of control public employee costs.  Not sure why, they're only paying $270k in compensation costs for each firefighter they have.  Seems reasonable to me.  Oh wait, you said firefighter?  I thought you said brain surgeon.  Vallejo is the canary in the coal mine.  More towns are in the same situation they are.  
  • Public sector unions are uberpowerful.  The American Federation of State, County & Municipal Employees has been the second largest political donor in the U.S. since 1989.  The head of the Service Employees International Union (SEIU) was the most frequent visitor to President Obama during the first half of 2009, and was recently named to the Deficit Commission.  These and other unions are backing a bill in Congress to change the legal environments for all states similar to what California has.
  • What to do?  Even if California remedied their overpayment today, they are still facing years of budgetary crunch.  Pension promises are guaranteed, either through state constitutions or contract law.  The best that governments can do is change the pension plans going forward - they are still on the hook for all the promises they've made to their current employees.  Even with an immediate fix, they probably won't see any budget relief for many years as current employees retire, collect their benefits and eventually pass away. 
  • Is your state overpaying?  That would be the next step in this research, to examine more states.  However, union density is a good indicator of strong union laws which likely means overpayment of public employees.  Table 1 below lists all the states in the order of union density.  If you're in the Northeast, North Central or West, you're likely having money sucked out of your wallet by union interests.  If you're in the Southeast, Southwest or Central states, you're doing better. 


Table 1 – Estimated Union Shares of State/Local Government Employment, Ordered by Union Share, Grouped by Bargaining Rights, 2008
Rank
Collective Bargaining for All Public Employees
Collective Bargaining for Select Groups
No Guaranteed Collective Bargaining
Collective Bargaining Prohibited
1
New York 75.5%



2
Rhode Island 68.8%



3
Hawaii 68.1%



4
New Jersey 67.3%



5
Connecticut 66.7%



6
Alaska 66.4%



7
Massachusetts 65.9%



8
Oregon 65.1%



9
California 61.9%



10
Michigan 61.4%



11
Pennsylvania 58.5%



12
Minnesota 58.2%



13
Washington 55.9%



14
Illinois 53.8%



15
New Hampshire 51.4%



16
Wisconsin 49.8%



17
Maine 48.2%



18
Vermont 42.5%



19
Montana 42.3%



20
Ohio 42.2%



21
Delaware 40.2%



22

Nevada 37.9%


23

Maryland 33.0%


24
Iowa 31.6%



25


Alabama 30.2%

26
Florida 27.9%



27

Indiana 27.3%


28
Nebraska 27.2%



29


West Virginia 24.8%

30

Missouri 22.1%


31


Colorado 20.7%

32


Arizona 17.3%

33

Oklahoma 15.5%


34

Kansas 14.6%


35

Idaho 14.3%


36

Kentucky 14.2%


37


Arkansas 14.1%

38

North Dakota 13.9%


39

Tennessee 13.4%


40
South Dakota 13.4%



41


Texas 12.6%

42


New Mexico 12.5%

43
Utah 12.3%



44

Wyoming 10.8%


45


Louisiana 10.8%

46



North Carolina 8.2%
47


South Carolina 8.2%

48


Mississippi 6.0%

49



Virginia 5.2%
50

Georgia 4.2%


Source: Chris Edwards, based on BLS data compiled by www.unionstats.org [4]. Legal information provided by the GAO and Washington Post [18] [19]. 

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