Tag Archives: union

Stockton, California tries to avoid bankruptcy via mediation

Stockton, California could become the largest city to declare bankruptcy in the US. On Tuesday the city council voted to skip $2 million in payments on $320 million in bonds. The bond insurer has promised to pay creditors in the event that the city cannot.

Now Stockton is in mediation. A new process, mediation is the result of AB 506, the intent of which is to slow bankruptcy proceedings by requiring all affected parties (debtors, creditors, unions) to meet and hammer out deals with a neutral party.

According to The Los Angeles Times, the city council is working on a restructuring plan. Since 2010 the city has twice declared a fiscal emergency. Pressure on city finances from rising health care benefits and debt associated with development projects have coincided with a period of depressed revenues and weak economic activity. Stockton has the second-highest foreclosure rate and eighth highest unemployment rate in the nation, reports Bloomberg News.

How the city reorganizes its finances is surely to be driven by the politics of unions and pension reform. The city faces a $417 million unfunded liability for employee health care benefits. How could that be allowed to happen? As a local city official tells The San Francisco Gate: “The problem is, nobody asked the question: ‘How do you fund it?’ And consequently there was no money set aside to fund those commitments,” Deis said. “It was an unsound decision and it has similarities to a Ponzi scheme.” Unfortunately, Stockton is not unique in this regard. Nearly all public sector health care benefits in state and local governments are unfunded.

In addition to its retiree health care costs, Stockton is paying 94 retired police pensions of $100,000 per year. As already accrued benefits, it’s not clear that the city has much room to modify this portion of the budget. And in fact, the police union is suing the city for reducing benefits. Another lesson in the importance of clear-eyed budgeting comes from Stockton’s troubles. Officials were caught off guard by the city’s sudden shortfall in part due to accounting gimmickry which included double-counting parking ticket revenues and overstating the city’s balance by $2.8 million.


Florida Senate Votes against Privatizing Prisons

Yesterday, the Florida state senate voted down a bill that would have privatized 27 of the state’s prisons. The shift was projected to save $16.5 million in a state with a $2 billion budget deficit. Theoretically, private prisons are projected to save money because they operate under a profit motive, putting them in a better place to find operating efficiencies compared to state run prisons.

While from a budgetary perspective prison privatization may make sense, the issue is not straightforward. Privatizing prisons creates an interest group that stands to profit from higher incarceration rates. The case of two Pennsylvania judges who accepted bribes from private prison interests in exchange for incarcerating 5,000 juvenile offenders, many of whom appeared in court for minor offenses without attorneys, brought light to this issue. Of course this illegal corruption does not represent the typical interaction between the justice system and private prisons, but does demonstrate the danger of crony capitalism in the industry.

In a paper for the Reason Foundation, Adrian Moore points out that prison interest groups are by no means exclusive to private prisons. Public sector employee unions also have incentives to grow their bureaucracy and protect their jobs by seeking harsher prison sentences. In Florida, the International Brotherhood of Teamsters, a union representing public sector prison workers, played an important role in the defeat of the privatization bill. The California Correctional Peace Officers Association is perhaps the most studied public prison lobby. The CCPOA has made extensive contributions to both political campaigns and to groups that fight for harsher sentencing laws.

Aside from the complicated issues that special interests bring to the US prison system, it’s important to take a critical look at the alleged budget savings that private prisons provide. While these prisons are privately run, they of course are not really private businesses, but rather government contractors. This means a layer of bureaucracy separates them from their consumers (taxpayers) and the market process is not in play as it is in a competitive industry. Rather than having an incentive to provide the best service at the least cost, private prisons face incentives to fulfill the most lucrative government contracts at least cost.

Some studies, including Moore’s, have attributed substantial cost savings to prison privatization, but other studies have found the opposite. In Arizona, private prisons actually cost more per inmate than public prisons, according to state data, even though they do not typically house the highest security, most expensive inmates that state-run prisons do.

Florida Governor Rick Scott still has the opportunity to use his executive power to increase the role of private prisons in Florida but said he had wanted legislative support for the measure. While the budgetary and policy impacts of privatizing prisons are ambiguous, one policy change would bring certain cost savings to Florida taxpayers. By some measures, Florida currently has the strictest laws against marijuana possession in the country, including potential jail time for possession of misdemeanor quantities of the drug. By reducing sentencing for victimless crimes including possession and distribution of marijuana, the state could certainly save money and potentially improve outcomes for the states youth who face drug charges.

Daycare unionization debate in Minnesota

A debate has been taking place in Minnesota over whether in-home day care providers should be able to unionize. Unionization of self-employed individuals raises a few questions. With whom do they negotiate? In other words, “How can you be the employer [the business owner] and a union employee?” According to the pro-unionization providers their complaint is not with the parent-client but with the state (and county) and its regulations. A provider may be cited for any number of small infractions such as not having a cover on a trash cash. When cited, in the case of Minnesota, such a blemish doesn’t just stay on the provider’s record, it must be posted on the owner’s front door for two years.

But is unionization the answer?

Daycare providers already have a state association to represent their interests. Few owners have actually been cited under these regulations. And unionization will result in dues that will raise prices for parents, as well as more state involvement in the owner’s business. An effort to stop unionization is also underway.

Since 2005, 15 states have organized childcare providers. The main fiscal outcome of daycare unionization is higher state-provided subsidies.

Washington state child care providers are represented by the SEIU which negotiates with Olympia over subsidy rates for providers as well as health insurance plans.

In 2009, providers in Washington received a state subsidy between $18 and $40 a day, per child, depending on the county. According to the SEIU’s 2009-2011 agreement with the state, both parents and providers are affected. Daycare providers who refuse to join the union for religious reasons must still pay dues. Rates are set for different age groups of children, (e.g. Infants are 15% higher than the Toddler/Preschool rate). After ten hours of childcare any additional hour is equal to one half day of child care.

The agreement also affects all taxpayers in the state. The state pays monthly contributions to provider’s health care plan ($588.8 per month per provider in 2010) for a total of $366,894 per month for all daycare providers. A further $175,000 is set aside by the state for training classes for providers. The result of unionization is not what advocates suggest. Instead flexibility is decreased for owners and clients to come to terms over hours, rates and arrangements while the ever-increasing costs are passed to everyone.

Why Do Some States Face Steep Borrowing Costs?

One of the interesting—and alarming—developments in state finance over the last few years is the spread between borrowing costs among the states. Unsurprisingly, the borrowing costs of all states jumped during the financial crisis and recession. But as the (anemic) recovery began, the borrowing costs of many states eased while those of some states like California and Illinois remained high.

A paper by Daniel Nadler and Sounman Hong of the Harvard Kennedy School offers one explanation:

Political-institutional factors—such as the political composition of state legislatures, and interstate variations in public sector labor environments, such as union strength, and collective bargaining rights—can explain a significant proportion of interstate variation in bankruptcy risk. We find that, controlling for multiple economic variables, states with weaker unions, weaker collective bargaining rights, and fewer Democratic state legislators pay less in borrowing costs absolutely, and less in borrowing costs at similar levels of unexpected budget deficits, than do states with stronger unions and a higher proportion of Democrats.

As this summary puts it:

According to the study, a 20 percentage point difference in the share of the public-sector workforce that is unionized is associated with an additional increase in state borrowing costs of 40.4 basis points.

Pension Hearings Wrapped up in Rhode Island

The Rhode Island legislature completed hearings on Tuesday on the reform bill proposed by Governor Chafee and Treasurer Raimondo. The proposed reforms, many explained here, include:

  • Freezing COLA increases in benefits for retirees for up to 19 years;
  • Creating hybrid plans for current and future employees with a defined contribution portion, similar to a 401(k) and a smaller, defined benefit portion;
  • Raising the retirement age from 62 to the age when individuals begin receiving social security;
  • Amortizing the remaining defined benefit plan over 20 years.
Now, lawmakers are debating potential amendments to the reform bill, and it could be weeks until they vote on a final version. Among union leaders, eliminating the COLA is understandably one of the most unpopular parts of the bill because it significantly reduces the amount of money retirees will receive over the the course of their retirement. However, this part of the bill is key in saving RI taxpayers about $3 billion and ensuring that the pension fund will remain solvent.
State union leaders suggest that instead of the reforms proposed by the state’s democratic administration, Treasurer Raimondo should adjust the fund’s actuarial assumptions. They support changing the fund’s expected growth rate from 7.5% to 7.75% and adjusting the assumed average life expectancy for retirees. Their resistance to more significant reform is surprising, given the dire consequences that union members suffered in Central Falls, RI. There, the local pension fund became insolvent, leading the municipality to bankruptcy. Now, many Central Falls pensioners are receiving less than half of the benefit that they were promised.
The fate of this bill in Rhode Island is important not only for local employees and taxpayers, but for troubled pension funds across the country. If Rhode Island is able to enact reforms that protect retirement benefits and taxpayers, it will serve as a model for other states.

The end of collective bargaining in California?

The Orange-County Register editorial page makes a case to return California to 1977. It was in 1978 when Governor Jerry Brown signed The Dills Act which mandated collective bargaining between public sector unions and California state and local governments. Now the California Center for Public Policy is gathering signatures for The End Public Sector Bargaining Initiative to be placed on the ballot in November 2012. If it passes unions would still operate and participate in political campaigns. The difference is that governments would instead bargain with individual public employees, rather than the union. And unlike Wisconsin’s reforms, the initiative proposes to extend the measure to include public safety unions.

How far the initiative gets is another story. In Ohio, unions are fighting to overturn (via a November 8 referendum) Governor Kasich’s 2011 bill that restricts collective bargaining to only negotiations over wages.




State and local pension plans: risky business?

The Washington Post reports on Census data that shows state and local pension plans on the mend.

The improvement in many state and local pension plans are a result of better recent stock market performance and increased contributions by both employers and workers as a result of pension reforms that were passed in 2009.  Additionally, some of the improvement is also due to lower payouts to current pensioners as a result of reforms to rein-in high benefit costs. But a caution is in order. Plans are still valuing their liabilities using discount rates that underestimate the potential for continued volatility in the stock market, potentially over estimating future expected market returns.  Rather, state and local pension plans should be using a discount rate based on Treasury rates that reflect the guaranteed, risk-free nature of these pension promises. In other words, the current accounting understates pension liabilities.

One claim strikes me in particular. According to one union official, plans are now starting to recover from Wall Street’s risky behavior. How does this remark square with the explicit outcome of how pensions are currently valued – that is- the incentive to take on more portfolio risk in order to realize high expected returns?

Getting People Back to Work

Germany’s unemployment rate is only 6.2 percent today. This is pretty remarkable given the severity of the recent recession, the slow growth of Germany’s trade partners (including the U.S.) and the unfolding fiscal crisis in the Eurozone.

NPR’s Caitlin Kenney attributes Germany’s relative success to a number of reforms adopted a decade ago. Kenney reports:

To figure out how Germany got where it is today, you need to go back 10 years. In 2002, Germany looked a lot like the United States does now, they had no economic growth and their unemployment rate was 8.7 percent and climbing. The country needed help, so the top man in Germany at the time, Gerhard Schroder, the German chancellor, made in an emergency call to a trusted friend.

The friend was Peter Hartz, a former HR director whom Schroder knew from his VW days. Schroder put Hartz in charge of a commission, the mission of which was to find a way to make Germany’s labor market more flexible. The Hartz commission made it easier to hire someone for a low-paying, temporary job, a so-called “mini job”:

A mini-job isn’t that great of a deal for workers. In these jobs, they can work as many hours as the employer wants them to, but the maximum they can earn is 400 Euros per month. On the plus side, they get to keep it all. They don’t pay any taxes on the money. And they do still get some government assistance.

They also reduced the generosity of unemployment benefits:

Here’s what you get if you’re out of work for more than a year in Germany: 364 euros a month – that’s about $500 – subsidized rent and heat, and a job counselor. Before the Hartz commission, you would get around 50 percent of your last income indefinitely for as long as you were unemployed.

Kenney says that Hartz “wanted to make unemployment uncomfortable so that people would get off of it quickly.”

These changes haven’t made Peter Hartz a popular figure in Germany. His legacy is controversial. He was convicted of paying off union leaders at Volkswagen to go along with his cutbacks.

But no matter how people feel about Hartz, it’s hard to argue with the huge drop in the country’s unemployment rate.

One country’s experience is not dispositive. But a number of carefully designed studies — relying on more sophisticated models and larger data sets — have reached much the same conclusion. Generous unemployment insurance and regulations that add to the cost of employment tend to make for a static, unhealthy labor market. Though designed to make life better for workers, these policies may do them more harm than good.


Windfall for Chicago Union Leaders

In Chicago, teacher union leaders have won the lottery of municipal benefits. Twenty-three union leaders will be receiving a total of $56,000,000 in retirement. For most, these pension benefits will be greater than the salaries that they made while employed by the union. On the 1991 law that has secured these benefits, the Chicago Tribune reports:

All it took to give nearly two dozen labor leaders from Chicago a windfall worth millions was a few tweaks to a handful of sentences in the state’s lengthy pension code.

The changes became law with no public debate among state legislators and, more importantly, no cost analysis.

Because of the secrecy surrounding the collective bargaining process between policymakers and organized labor in Chicago, the article explains that it is difficult to determine the lawmakers responsible for this policy. The $56 million in pension benefits is a relative drop in the bucket at this point for the Chicago Teachers’ Pension Fund, which has been underfunded by $5 billion in the last 10 years.

However, the process by which union leaders secured these benefits is symptomatic of Illinois’ larger pension problems. Twenty years ago when lawmakers agreed to guarantee these benefits, they were not concerned about the long-term repercussions to the pension funds’ solvency, or for that matter what the size of the bill might be for future residents.

Lawmakers have the incorrect incentives to manage pension funds because they think in terms of election cycles, where strong union support can make sure they stay in office, rather than the long horizon over which taxpayers will be forced to fund these promises. Eileen Norcross documents this misalignment of incentives in a forthcoming we will be discussing further here.

When Does Each State’s Debt Reach 90 Percent of GDP?

Few economic studies have received as much attention as Carmen Reinhart and Kenneth Rogoff’s “Growth in a Time of Debt.” The attention is well-deserved. Reinhart and Rogoff have painstakingly assembled data on debt from over 40 countries covering 200 years, making it the largest dataset of its kind. They then examine the way debt impacts economic growth and find that as nations’ debt-to-GDP ratios go from 30 to 90 percent, their growth rates decline markedly. In the best case, their real average annual growth rates decline by about 1 percentage point; in the worst case, the growth rate is halved.

To put this in perspective, if in 1975, the US growth rate had slowed by 1 percentage point, our current economy would be about 30 percent smaller than it actually is. And if our growth rate had been cut in half, then the current economy would be nearly 43 percent smaller than it actually is. In other words, an entire generation’s worth of economic growth would not have occurred.

Absent policy change, the CBO is projected that federal debt held by the public will be 90 percent of GDP within 7 years.

But what about the states? They, too, face a grim fiscal future. Harvard economist Jeffrey Miron recently examined this question for the Mercatus Center. In it, he concludes:

[S]tate government finances are not on a stable path; if spending patterns continue to follow those of recent decades, the ratio of state debt to output will increase without bound.

Miron then calculates the year at which each state’s debt will exceed the fateful 90 percent mark identified by Reinhart and Rogoff. To help visualize Miron’s work, I have created a short YouTube video that shows the states whose debt levels exceed 90 percent of state GDP at certain time periods. Absent policy change, debt in every state of the union will be greater than 90 percent by 2070. But many of us don’t have to wait that long. In a number of states, the day of reckoning will come much sooner.


Read Miron’s entire, informative, analysis here.