Sorting Out the Collective Bargaining Rights Question

I have largely avoided writing on the Wisconsin issue since it has been getting coverage from every angle all over the place. But David Cay Johnson had to go write a silly piece for and Rick Ungar had to follow blindly on his Forbes blog. Fine. I’ll bite.

The gist of what Johnson wrote is that the whole Wisconsin debate is a lie since the union pension program is paid for by union employee contributions. Not state tax dollars. Ergo, Walker saying he needs union members to contribute more to their pensions to save taxpayers is political grandstanding to bust unions.

Perhaps Johnson (and Ungar) haven’t heard of the state pension crisis. The short story on that is states are in the hole for at least $1 trillion, and likely double that, because they have mismanaged their pension funds over the past several years. But let’s breakdown the Johnson/Ungar argument to clarify a bit.

State pension funds have become a problem for two core reasons. First, they were not managed well by the states, and there were assumptions that pension funds could invest and get high returns (think 7% to 10%) returns on a consistent, annual basis. In fact, some states have it written as law that they need to get return like this while investing their pension funds. It is a ridiculous assumption. And the economic downturn has exposed the wishful thinking as a serious fail on fiduciary duty by lawmakers of yesterdecade. As it turns out, Wisconsin is one of the better states in terms of managing this aspect of its pension system. But (there is always a “but”…), second, pension funds also have a problem because unions have abused their collective bargaining rights (CBRs) to force state legislatures into make unsustainable promises for their pensions and health care. This was not just state legislative failure, but union failure as well (more on that below).

There are not enough dollars going into the pot to pay out to everyone what was promised over the long-term. It doesn’t matter that Wisconsin cut taxes (to boost economic growth). What matters is that the state can not afford the current promises it has made and this has been because of failure in management and negotiations in the past that account for the future. And that has consequences. Here are the state’s basic options:

  1. Have the taxpayers cover the shortfall. Unless the law is changed, Wisconsin is obligated to pay pensions as promised. But since the money isn’t there (because of state mismanagement—and not by Walker, he just became governor two months ago) Wisconsin will need to use taxpayer money to bailout the fund.
  2. Alternatively, the state could declare itself fiscally incapable of paying out the pensions, just not do it, and basically figure out some kind of way to declare bankruptcy. This would hurt taxpayers too because it would mean the cost of state borrowing in the future would be much higher. States borrow short-term all the time to make payroll, and other expenses since tax receipts are often staggered. If the state refused to make the pension payments then lender would change the state more money in the future to do that short-term borrowing, charges that would cost taxpayers more.
  3. They can change the law and require more contributions to the pension book and remove the CBRs so that this doesn’t happen again in the future.

Clearly, #3 is the only good choice here. And clearly the taxpayers are on the hook.

Johnson argues: “Out of every dollar that funds Wisconsin’s pension and health insurance plans for state workers, 100 cents comes from the state workers.” Currently that is true. But when all of those dollars go away, a contract says the state has to pay. And where will that money come from? Taxpayers. Thus, Walker’s concern—and the concern of every other governor grappling with pension problems. They are not all liars, like Johnson/Ungar would have us believe.

Well, at least not on the pension issue. We are talking about politicians afterall. Definitely not the most honest bunch.

Nevertheless, the real numbers don’t lie here.

But Rick Ungar is ready to come to the rescue, offering and “Update” on his blog post after getting criticism point out the validity of arguments like the one I just laid out above. His retort: There is truth in this view, but “not much” truth.

How can there be “not much” truth in such a simple argument that when governments mismanage pension funds with defined benefits that taxpayers have to pick up the pieces with the money runs out? Ungar weakly throws out this statement:

“Because the pension plan is a defined benefit plan — requiring the state to pay the agreed benefit for however long the employee may live in retirement- if the employee lives longer than the actuarial plan anticipated, the taxpayer is on the hook for the pay-outs during the longer life. But is this the fault of the state employees? The pension agreements are the result of collective bargaining. That means that the state has every opportunity to properly calculate the anticipated lifespan and then add on some margin for error.”

I feel like he is making my point. Certainly, when pensions are run well they calculate the necessary funds needed to meet all of the contractual benefits promised, then see to invest to ensure that cash is available with contributions from employees. But the problem is that THAT DIDN’T HAPPEN. Its the whole reason we are here. The state failed to manage properly. So how could this possibly be a reason that my argument is limited in its truth. It helps to support the argument.

But the hinge of Ungar’s counterargument is next:

“What’s more, the losses taken by the pension funds over the past few years can hardly be blamed on the employees… While the governor of Wisconsin is busy trying to shift the blame to the workers in an effort to put an end to collective bargaining, the reality is that it was the state who punted on this — not the employees.”

So here we go. Alright, technically, the teachers union didn’t run the pension fund. They didn’t make the investment decisions. So you could certainly argue that the state management failure wasn’t their fault. However, the union bosses negotiating the contracts also have a responsibility to their union members to ensure that the contract signed can be fulfilled. The union should have known it was asking for unsustainable compensation promises. They are not fully to blame, but they share the blame.

If the unions were blameless then it would be easy to see why attacking CBRs doesn’t make sense. Why take away negotiating power when it wasn’t part of the problem? Unfortunately, though, it was part of the problem. And that is why we are still arguing about it while protesters dare police to arrest them for wearing out their welcome in the rotunda of the state capitol.

Once you accept that the unions leveraged their political power to get unsustainable contracts that have put the taxpayers of Wisconsin on the hook to bail out funds that were mismanaged by the state, then Scott Walker makes sense. This is about the future of Wisconsin, not just the present. The state got in this mess because public sector unions are a monopoly on state labor and have been manipulating the political process. Yes, state unions are monolopolies that expressly got themselves exempted from anti-trust law. How messed up and backwards is that?

State workers who have to be in unions and have to pay dues are contributing to a bureaucratic monster. Public sector unions (distinct from private sector unions) contributed some $200 million to Democratic campaigns in 2010. They supported candidates that would support their unsustainable pension benefits and tried to get re-elected those that had given them juicy compensation packages in the past. What a frightening system when looked at in that light! That has to be stopped and that is why Walker is pursuing it. (Plus, killing the collective bargaining rights doesn’t mean teachers unions can negotiate pay as a group. And Wisconsin law protects the rights of workers in many other ways.)

At the end of the day, the simple reality is that the state pension and health care fund is running out of money and will have to be bailed-out by taxpayers unless a change is made. It was mismanaged, and Walker is trying to keep that from happening again.

The final argument from Ungar is this:

“As a result, the taxpayers do not contribute to the public employee pension programs so much as serve as insurers. If their elected officials have been sloppy , the taxpayers must stand behind it. But if the market continues to perform as it has been performing this past year, don’t be surprised if the funding crisis begins to recede. If it does, what will you say then?”

Look, I don’t know Rick Ungar. I’m sure he is a great guy. But this really is missing the whole point. What will I say when the economy gets back in swing? Be fiscally responsible. The same message as now.

Taxpayers should be insurers for state workers. They shouldn’t be insurers for anyone. That is what too big to fail is all about. Taxpayers should insure banks. They shouldn’t insure hedge funds or auto companies. And they shouldn’t insure state pension funds. It doesn’t matter if the market recovers and the pension system can earn 8% a year again. What about the next crisis? How do we know the next pension managers will do well? When the market is back on track, and returns are high, we shouldn’t depend on state fund managers to “get it right” the next time. There is just as much chance of failure in the future as there was in the past. We shouldn’t be dependent on such a volatile system that puts the hard earned cash of taxpayers on the line. We should always operate on sound fiscal principles.

So, if you want to look at the numbers and say taxpayers aren’t contributing now (even though they pay the salaries), that is fine. I’ll give you that. But they still are going to pay if Wisconsin doesn’t fix its state management. And that doesn’t mean just short-term fixes. It means thinking about the long-term too.

P.s. While I think public sector unions should eventually disappear (but keeping private sector unions that are not monopolies), I do think there is value to Bloomberg’s approach, which is basically redefine how CBRs are used and how contracts are structured to get inline with the 21st Century. If public sector unions are not going away, then this is a next best approach.