Public-Service Unions Working Against the Public Good

Two lessons we learned over the course of the COVID-19 pandemic are that school-age children are very seldom at serious risk from the disease and that online learning is grossly inferior to in-person learning. This has set children back in very serious ways, both academically and socially. As a result, there has been a strong push to get children back in school.

But in some school systems, such as Chicago’s, the teachers’ unions just said no—flatly refusing to return to the classrooms until a series of self-serving demands were met. And local governments, especially those long dominated by the Democratic Party, have been unable, or unwilling, to force the issue by, say, withholding salaries. 

So perhaps the biggest lesson of the pandemic has been that allowing public employees to bargain collectively, much as private-sector unions do, has turned out to be a disastrous mistake in public policy.

The Rise of Public-Service Unions

There have been public-service unions since the early 20th century. The Boston police strike of 1919, which propelled Calvin Coolidge towards the presidency, was fought over the right of policemen to unionize. 

Police unions were common by the mid-20th century. But they did not have the power to strike against the government. And they did not have the right to set wages, benefits, and work rules via collective bargaining. Essentially, they were there to protect the members from abusive managers in grievance proceedings.

But in the early 1960s the labor movement, already in decline, was looking for ways to expand its reach. In 1959, the then famously progressive state of Wisconsin allowed labor unions to recruit government workers and to bargain collectively.

President Kennedy then persuaded Congress to change federal labor law making it much easier for unions to organize government workers at the state and local level.

Over the next 60 years, while private-sector union membership dropped from about 35 percent of the labor force to only 6.2 percent today, public-sector membership soared to 33.6 percent, up from practically zero in the early 1960s. 

It was billed as just a way for government workers to have the same negotiating rights as workers in the private sector. But, in practice, public-service unions, with the help of mostly Democratic politicians, have become a cancer that in many states is eating the public fisc alive.

An Unnatural Advantage for Labor

Franklin Roosevelt, who was very pro-labor when it came to the private sector, was adamantly against collective bargaining for government workers. “All government employees should realize that the process of collective bargaining, as properly understood, cannot be transplanted into the public service,” he wrote.

Roosevelt understood that there are two fundamental reasons for this. First, corporations are wealth creation machines. In a corporation, people come together under a set of rules in hopes of creating more wealth collectively than they could individually. And both capital and labor are necessary to create that wealth.

So when management and labor sit down to work out a new contract, they are basically negotiating over how to divide the wealth created by both capital and labor between capital and labor. And both sides in a corporate negotiation have a powerful incentive to get the balance right in order to preserve the power of the corporation to create wealth for both sides.

But in the public sector, no wealth is created and so there are no profits to divide. Instead, the two sides are, quite literally, negotiating over how much of other people’s money—which is to say the taxpayers’ money—the union members should get.

So there is little incentive for hard bargaining on the government side of the table. As long as the new contract will not have an immediate adverse impact on the politicians who agree to it, they will not fight hard. At the same time, there is every incentive for the union leaders to push hard, in order to bring home the bacon for their members and get reelected as union leaders. 

Thus wages and benefits in public union contracts have tended strongly to ratchet upwards in each succeeding contract regardless of growth in tax revenues and GDP. The total compensation of public sector workers today is substantially above comparable workers in the private sector.

The second reason collective bargaining cannot work in the public sector is even more consequential.

In the private sector, neither labor nor management has any say whatever as to who sits on the other side of the table. But that is most definitely not the case with collective bargaining in the public sector. While government has no say as to who negotiates for the unions, the unions have a great deal of influence over who negotiates for the government.

Unions have been the leading source of funds for Democratic candidates since the New Deal era and, naturally, they expect a return on their investment. Politicians, to ensure future campaign funding, have every personal incentive to see that they get it.

It is a situation as deeply corrupt as it is perfectly legal.

The tricky bit, of course, is for the politicians to assure that the public doesn’t come to understand how generous the contracts really are. Outsized wage increases would cause public opposition to build. So the most expensive parts of public union contracts tend to be in benefits such as health insurance, in work rules whose costs are not obvious but nonetheless very real, and in pensions, whose costs are mostly manifested in the long term.

Real-World Consequences

Consider some of the real-world consequences of public-sector collective bargaining.

Corporate pension plans became commonplace in the late 1940s and ’50s. But when inflation took off in the 1970s and government control of interest rates weakened, the future costs of pensions became much harder to calculate, which threatened future profitability. 

Since about 1980, the private sector has almost entirely switched its retirement systems from defined-benefit ones, such as traditional pensions, to defined-contribution plans. 

Often employers match the contributions towards the retirement of their employees up to a certain percentage of their pay, often 10 percent, encouraging workers to properly fund their own retirements.

In the public sector, however, pensions remain the norm. By 2014, only 18 states had switched over entirely to defined contribution retirement systems. And the pensions are often far more generous than private-sector pensions ever were. 

In Illinois—the poster child of overly generous and underfunded pensions—public employees can retire after 30 years on the job, often with full benefits. Sixty percent of state workers in Illinois have retired by the time they reach 60. Retirees get an automatic three percent cost-of-living adjustment every year, regardless of inflation or the lack thereof. That has the effect of doubling their pensions over the course of 24 years.

Many companies allow their workers to take sick days. But in the private sector, unused sick days disappear at the end of the year. In many public-sector contracts, however, workers can accumulate them and have them count as workdays in their final year. This results in a sometimes much higher pension as pensions are usually calculated on the wages paid in the last few years of employment.

Many plans also allow workers to pile on overtime at the end of their careers, further increasing their pensions. The result is often very generous pensions indeed. In California, 40 percent of government retirees have pensions of over $100,000 per year.

And the employee contributions to the pension fund are often way below what they were in the private sector. Illinois taxpayers now contribute more than three times as much to the pension fund as do the employees.

Worse, politicians have sometimes turned pension funds into slush funds. For instance, the Illinois legislature in 1996 empowered the Chicago public school system to take a “pension holiday,” in other words not pay into the pension fund. Most of the money saved went to increased teacher salaries, which rose on average 4.2 percent per year between 1998 and 2012. But while the fund had been fully funded in 1999, by 2013 it was $9.6 billion in the hole, with only half the money needed to pay the full benefits that are guaranteed by the Illinois constitution.

Properly funding these big pensions would require states and cities to devote more and more of their annual revenues to the pension funds, crowding out other spending and generating political backlash.

The result has been a lot of book cooking. Corporations must keep their books according to Generally Accepted Accounting Principles (GAAP) and have them certified by independent accountants. They can’t play accounting games to paper over problems without risking severe criminal penalties.

But states, while theoretically obliged to follow GAAP rules, do not have truly independent certification of their books. State controllers and treasurers are supposed to certify a state’s books and make sure there is no fraud or deceptive practices. But these state officials are political animals, often without accounting experience. They are elected in most states and all have higher political ambitions. 

Under the doctrine of state sovereignty, the federal government has no power to intervene, and so many states employ a variety of accounting gimmicks, such as unrealistic assumptions on yield, to avoid the current fiscal pain needed to properly fund the overly generous terms of a collective bargaining agreement.

Work Rules Working Against the Public

Wages and benefits are not the only problems with public-sector unions.

Negotiated work rules and procedures have often made it almost impossible to fire workers who underperform or commit egregious, but not criminal, misconduct. Police unions routinely protect cops regardless of how many complaints have been filed against them. 

Negotiated arbitration rules are designed to make it hard to terminate a union member. In New York City, the Police Benevolent Association has a contractual right, in effect, to choose the arbitrator in police discipline matters. And adverse decisions that don’t result in termination are expunged from the personnel records after two years.

Aryeh Eller was a music teacher in New York City until he was accused in 1999 of sexual misconduct with female students and was removed from the classroom. He was sent to a reassignment center—called “rubber rooms” by teachers. His case was thrown out by arbitrators on a technicality and the New York City School Board for some reason did not appeal. 

But the school system was not willing to have him back in a classroom. Today, still in the reassignment center, he earns $139,753 a year to do nothing, plus generous health and pension benefits (and with summers off). There are currently about 600 New York City teachers twiddling their thumbs in rubber rooms.

Tenure was a system developed in universities to give scholars the freedom to hold unpopular opinions. But teachers’ unions have negotiated tenure for their members. It is not granted to individuals on a case-by-case, earned basis. Instead, it is automatically given to all teachers who have worked for the requisite number of years, often only two or three. In other words, avoid getting fired for two or three years and you can’t be fired thereafter for, say, mere incompetence.

And while teachers are proud to be professionals, the teachers’ unions have fought, successfully, to treat them like blue-collar workers in terms of pay. Pay grade is determined only by educational level and seniority. The more years a teacher has been teaching, however badly, the more he or she gets paid. 

Thus teachers have no monetary reason to work harder than other teachers to achieve better educational results because they will not be rewarded for doing so.

Searching for Solutions

What can be done? It will not be easy as very powerful forces—unions and the politicians themselves—are deeply invested in the status quo that works so well for them however disastrous it is for the country as a whole. 

But it can be done. Governor Scott Walker of Wisconsin proved it.

The election of 2010 was a political wipeout for Democrats, and Republicans took control of the Wisconsin governor’s office and both houses of the legislature. The budget for 2012-2013 (Wisconsin has two-year budgets) faced a $3.6 billion deficit out of total spending of $66 billion. 

In February 2011, Walker proposed Act 10. It limited collective bargaining for most government workers (police, firemen, and state troopers were exempted) to wages only and required that the union membership recertify the union every year. If a contract called for an increase in wages above inflation, a public referendum was required to approve it. The automatic deduction of union dues was ended as was mandatory union membership. Workers had to begin contributing substantially towards their health and pension plans.

All hell immediately erupted. The halls of the state capitol were soon jammed with people protesting the bill. Then 14 Democratic members of the state senate fled to Illinois to prevent a quorum. But despite the uproar, it got done and Walker signed the bill into law on June 29, 2011.

Five years later, much had changed. Union membership had greatly declined. American Federation of State, County, and Municipal Employees District Council 40 in Madison lost 70 percent of its membership and 63 percent of its income. Other public-sector unions faced similar losses.

With much-reduced income, the unions saw a corresponding drop in political influence. The MacIver Institute, a Madison, Wisconsin, free-market think tank, estimated that in the first five years Act 10 had saved Wisconsin $5.24 billion in reduced pension fund costs and other savings. The Walker Administration not only closed the budget gap it had faced but cut the state income taxes by $2 billion. 

Local governments benefited as well. Over 500 governmental bodies in Wisconsin, from local school boards to major departments of the state government had seen more than $1 million each in savings.

Breaking the Democratic Party-Public Sector Union Axis

Most red states, where Republicans dominate, have managed to keep their fiscal houses in order by limiting union power in the public sector. But where the axis between the Democratic Party and public-service unions is strong, such as in Illinois, California, New Jersey and New York, reform has proved impossible and the fiscal situations in those states continue to deteriorate. Illinois’s bond rating is barely above junk status, increasing the state’s cost of borrowing, while it is months behind in paying its accounts payable. 

Other blue states are in similar predicaments and, without a Wisconsin-style reform, it will only get worse. That risks default or even bankruptcy (although it is unclear if a state, sovereign within its own domain, can formally declare bankruptcy, which is a federal responsibility). A Wisconsin-style reform will take a very determined electorate and politicians with great political courage. But whether through politics or bankruptcy, the corrupt Democratic Party-public-service union axis will end.

For as the late economist Herbert Stein once famously explained, “If something cannot go on forever, it will stop.”

 

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