Tag Archives: unions

New Edition of Rich States, Poor States out this Week

The fifth edition of Rich States, Poor States  from the American Legislative Exchange Council is now available. Utah took the top spot in the ranking of states’ economic competitiveness, as it has every year the study has been produced. Utah excels in the ranking system because it is a right-to-work state, it has a flat personal income tax, and no estate tax, among other factors considered in the study.

The other states that round out the top ten for Economic Outlook include South Dakota, Virginia, Wyoming, North Dakota, Idaho, Missouri, Colorado, Arizona, and Georgia. On the bottom end of the ranking, the states with the worst Economic Outlook are Hawaii, Maine, Illinois, Vermont, and New York at number 50 for the fourth year in a row.

Several measures of economic competitiveness offer supporting evidence that these states have some of the worst policies for business including Mercatus’ Freedom in the 50 States and the Tax Foundation’s State Business Tax Climate Index.

The authors of Rich States, Poor States, Arthur Laffer, Stephen Moore, and Jonathan Williams demonstrate Tiebout Competition in action. They find a strong correlation between the states that have high Economic Outlook rankings with the states that are experiencing the highest population growth through domestic migration. Likewise, the states that experienced the largest losses due to out-migration include Ohio and New York, ranking 37th and 50th respectively.

The study draws attention to the role that unfunded pension liabilities play for states’ future competitiveness, as this debt will require difficult and unpopular policy decisions as current tax dollars have to be used to fund past promises. Laffer, Moore, and Williams draw a comparison between Wisconsin’s recent reforms that put it on a more sustainable path compared to its neighbor Illinois:

In stark contrast to Wisconsin’s successes, the story in Illinois is not so uplifting. Over the last 10 years, Illinois legislators have continuously ignored the pension burden in their state—so much so that Illinois has one of the worst pension systems in the nation, with an estimated unfunded liability ranging from $54 billion to $192 billion, depending on your actuarial assumptions. Furthermore, the official state estimates do not include the $17.8 billion in pension obligation bond payments that are owed. In addition, Illinois policymakers have spent beyond their means, borrowed money they don’t have, and made promises to public employee unions that they cannot fulfill. Not only did Illinois face significant unfunded pension liabilities, but also lawmakers had to confront large deficits and potential cuts to state programs.

While the policies that improve state economic competitiveness are clear, the path to achieving them is difficult after voters grow accustomed to programs that their states cannot afford. However the bitter medicine of reform is worthwhile, as we know that economic freedom is not only better for business, but evidence shows it also improves individuals’ well-being.

Potential Pension Cuts for Retired Teachers in Illinois

There was an interesting op-ed in the Chicago Tribune recently that points to the severity of Illinois’s pension mess. According to the Teachers’ Retirement System (TRS) in Illinois, if new revenues are not generated then benefits for current retirees may need to be cut via COLA reductions. This statement should not come as a surprise considering the state’s pension system is slated to run out of assets within the next decade.

As expected, however, teacher unions are unhappy with this discussion and have already deemed it unconstitutional. Unfortunately, because current benefits are protected in Illinois’s state constitution, this is a common fall back for nearly every argument against changes to the pension system.

Reducing COLA benefits may sound extreme but, as we already know, this type of reform was celebrated as a bipartisan success in Rhode Island last year. Unfortunately, during the same time, the Illinois TRS was releasing statements like this one:

The Tribune’s July 5 editorial ‘Rescuing public pensions’ is centered on the false premise that Illinois’ current pension plans for public employees are ‘doomed’ and unsustainable. The truth is that the state’s pension plans are sustainable.

One word comes to mind after reading that… scary. Illinois’s pension system is surely not sustainable. If the state continues to tell people that it is then the possibility for serious structural reform will become less likely. Reducing or suspending the COLA is one of many important steps that Illinois needs to consider.

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.

Detroit within months of bankruptcy

Over the past several weeks, Detroit Mayor Dave Bing has offered a stark picture of the city’s near-term prospects. By April the government will run out of money. The city faces a shortfall of $45 million, with an accumulated deficit of $180 million.

Detroit’s problems didn’t start yesterday. As The Economist writes the combination of falling property values, shrinking population, the rising cost of public services in a sprawling city, and the effects of the recession, “have provided the trigger for the crisis.”

Mayor Bing’s plan to shore up the city’s budget includes raising revenues with an increase in the C-corporation tax, and collection of past receivables, cutting spending by eliminating furloughs, a 10 percent pay reduction, 1000 layoffs, minor changes to retiree pensions, modified contributions to employee health plans, outsourcing the management of bus services, and a 10 percent reduction in vendor payments. These actions are estimated to save $258 million.

The wild card is what will happen to Detroit’s pension system. Without reform the city’s rising pension costs will continue to batter Detroit’s finances. The city’s pension and health care costs represent 13 percent of Detroit’s budget, or $218.5 annually. Unless Detroit’s 45 unions agree to structural changes, the Mayor warns, Detroit will be taken over by a state-appointed receiver according to Michigan’s emergency manager law.

Mayor Bing’s plan doesn’t have a great deal of support from the City Council with the rhetoric becoming increasingly charged against the Mayor and the notion of a state takeover of the city’s finances. But in order to avoid a takeover the Mayor and Council must come to an agreement. In the meantime, Moody’s is reassessing the city’s general obligation debt and sewer bonds ratings. Standard and Poor’s rates Detroit’s long-term general obligation debt BB, with a stable outlook.

 

 

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.

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.

 

 

 

Unions sue New Jersey over pension changes (and a Judge files a separate lawsuit)

In response to the New Jersey legislature’s June pension reforms, New Jersey’s unions have sued the state. The move is not unexpected. Similar actions were taken by unions in Minnesota, Colorado and North Dakota over proposed COLA reductions.

Unfortunately, New Jersey’s pension system is in seriously bad shape and slated to run out of assets to pay out pension promises by the end of the decade. The reasons for this have been discussed many times before. First, is the fundamental misvaluation of pension liabilities, the systematic under-contribution that flows from that and policy choices such as pension holidays, skipped payments and benefit enhancements. To fund pensions according to Joshua Rauh, New Jersey would require the largest per household increase in contributions at $2,475 per household, per year.

In a new paper to be posted soon, my co-author Roman Hardgrave and I take a deeper look at New Jersey’s public employee benefit bill on a local basis. When fully accounting for pension promises, OPEB and other benefits the cost of compensation on the local level is far greater than is recognized.

In the case of Colorado and Minnesota the unions’ suit was thrown out on the grounds that there is no specific right to the COLA. How will the NJ court decide on formula changes and the COLA freeze? Interestingly, a N.J. Superior Court judge has also filed a lawsuit against the state. He says the new law should not apply to judges since the N.J. Constitution says judges’ pay, “shall not be diminished during their term of appointment.”

 

Job creation or job protection in California?

The Mercury Sun News editorial provides a strong critique of several pieces of new Sacramento legislation, claiming the bills are simply jobs protection measures for unionized employees.

The bills include Senate Bill 469 which requires cities to conduct an economic impact analysis before approving big-box stores that sell groceries. Unions are for it. Grocers and land developers are against it.

AB 646 and AB 455 involve labor negotiations with unions. SB 931 forbids local government from using taxpayer funds on lawyers or consultants advising on how to get around union rules – which could be interpreted in one of two ways – does it limit local spending or does it favor unions?

And AB 438 requires public notice before a city can withdraw from a public library and contract with a private provider while “barring lower pay rates and layoffs in a new system.”

If the editors’ analysis is correct, the bills show how public sector unions as a special interest can acheive their goals outside of the collective bargaining process. At least one California legislator has introduced a bill aimed at collective bargaining reform. It could be that these bills aimed at local government may be part of unions’  pro-active strategy to prevent layoffs or firings of public employees should local governments introduce competition to city services.

Reforming disability retirement in Montgomery County, MD

On the heels of Atlanta, Georgia’s sweeping pension reforms, and the cooperation of New Jersey Republicans and Democrats to reform pension and health care benefits, comes the news that City Council President (and former private sector labor leader) Valerie Ervin lead the Montgomory County Council to vote to reform disability retirement for public workers. Unions opposed the measure saying it was an issue for collective bargaining. Ervin’s reply: the council has stayed out of disability retirement for 21 and half years waiting for the unions to budge to no avail.

The political shakeup resulting from public union intransigence is noteworthy as  Robert McCartney writes in The Washington Post. Public unions wield political power. Last year a city council member was voted off the board due to union opposition for backing pension reform. In Montgomery County, “unions have played an out-sized role in politics…partly because they’re open-handed with campaign contributions and campaign workers.” Ironically perhaps union support and “boots on the street” were instrumental to Ervin’s election in 2006.

What has changed in a year? State and local budgets haven’t improved. Revenues are tight and the costs associated with benefits, often negotiated with unrealistic and erroneous accounting assumptions, are beginning to eat up larger portions of the funds used to operate services. Unions’ strategy of refusing to face numerical reality has led to budgetary gridlock and the emergence of a newly pragmatic tenor in labor-government negotiations.