The recent statement by U.S. Bankruptcy Judge Christopher Klein that public pensions deserve no special protection in municipal default has elicited understandable praise from fiscally sane observers. Alongside a similar ruling by the federal judge overseeing Detroit’s restructuring, Klein’s long awaited opinion in the case of Stockton, California, gives elected state and municipal officials nationwide needed leverage to begin rolling back unrealistic pension expectations.
But if the ability of bankrupt governments to treat pension debt on a par with other obligations results in nothing more than increased pressure on public employee unions to renegotiate extravagant retirement promises, the result will be, as Chicago Mayor Rahm Emanuel might put it, “the waste of an opportune crisis.”
With daily headlines about the budget problems plaguing Emanuel’s own state of Illinois, New Jersey, Rhodes Island, and at least a dozen California cities, the public has gradually become aware of how government unions have used cash donations and free campaign labor to persuade state legislators to enact remarkably generous pension benefits. The resulting promises have become so unaffordable that the nation’s top 25 retirement funds, according to Moody’s Investors Service, are cumulatively underfinanced by $2 trillion.
Less well appreciated is the extent to which union leaders have also lobbied to pass or retain state statutes insulating government workers from efforts by towns, cities, counties, school districts, and other localities to operate more effectively. The best known of these are probably public school tenure laws, which guarantee lifetime employment to teachers who have worked in the classroom for only a few years.
But from the perspective of local elected officials and citizen volunteers on municipal finance and school boards, mandates that automatically send labor disputes to binding arbitration are just as costly. Unions like having outside arbiters come in to settle pay and benefit conflicts, explains Paul Kersey, Director of Labor Policy at the Illinois Policy Institute, because they can make extravagant demands and “arbiters always just split the difference. It is the rare one who takes the time to figure out what a community can actually afford.”
In June of 2008 an arbiter in San Luis Obispo, California, awarded police officers an immediate 22.28 percent salary increase, raising average annual compensation before overtime from $71,000 to $93,000. While most judgments are not this extreme, a study of communities outside Manhattan by New York’s Empire Center found that union locals going to binding arbitration between 1974 and 2012 enjoyed salary increases three times faster than those who did not.
Many less pricy mandates intended to benefit public employees have other serious consequences. These include the intentionally burdensome regulation of charter schools, which operate free of union work rules, and statutes like the one in Connecticut which denies state education subsidies to any town lowering its school budget, even to accommodate a declining enrollment.
And because such mandates often effect the quality of the typical municipality’s most important responsibility, public education, the burden on taxpayers goes well beyond the immediate numbers, eventually increasing the need for more welfare benefits, remedial reading and math programs, and even prison space. In 2008, Dr. Vicki Murray did a study for California’s Pacific Research Institute which put the extended “social cost” of that state’s union-dominated education system at up to $13.9 billion annually.
As far back as 1980, then-New York City Mayor Ed Koch wrote a paper for the policy journal Public Interest warning that the greatest threat to American cities came, not from the growing pension burden, but from the inexorable tendency of labor-controlled statehouses to encroach on local decision-making. Just two years later an unsympathetic Albany legislature proved his point with an amendment to the state labor negotiation law, making it illegal for municipalities to change any provision of an expired contract and to this day giving unions the power to resist concessions.
If the governing crisis created by decades of collusion between public employees and their statehouse allies cannot be solved by pension reform alone, a closer look at where unions have already demonstrated flexibility suggests a strategy for dealing simultaneously with both inflated retirement promises and burdensome mandates. Since 2011 a number of financially pressed cities, including Atlanta, Georgia, and Lexington, Kentucky, have negotiated significant pension savings by creating a two-tier system, one that requires a more modest sacrifice from current and retired public workers than from new hires.
Although loath to admit it, union leaders have proved willing to impose significant pension reform on new hires — including defined contribution plans, extended retirement ages, and declining cost-of-living adjustments (COLAs) — if current and retired workers can keep more of previously promised benefits than a more uniform system would allow. In Detroit, where unions cried crocodile tears about a 4.5 percent pension cut, new hires who retire after thirty years will receive pensions worth 40 percent less in inflation-adjusted dollars than those who retired in 2011, a new-to-old worker sacrifice ratio of 10-to-1.
What this means, when combined with the leverage of a firming legal opinion that all creditors are equal in bankruptcy, is that financially pressed governments can pressure their unions to trim excessive pensions in order to avoid even deeper cuts in default. At the same time, the rollback of state mandates can be the price for a two-tier pension system giving current and retired workers a kicker to ease the pain of reduced expectations.
Such an arrangement would in fact be as fair as now fiscally possible to the many public employees who never had any interest in union politics and who are, as much as taxpayers, the victims of pension promises that could never be kept. More importantly, it would restore the kind of autonomy to municipalities that once made local government in America the envy of the world.
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