“No Man’s life liberty or property is safe while the legislature is in session”.

- attributed to NY State Judge Gideon Tucker

Friday, March 4, 2011

RomneyCare Plunges Ever Deeper Into Trouble In Massachusetts

Wednesday's Wall Street Journal had an article detailing the continuing woes of Massachusetts' RomneyCare.

Now, a new bill is being proposed to require unions to toss their members into the system. And a rationing board is being proposed, while medical insurance costs continue to spiral out of control- even higher than several economists estimate it would have without all the interference.

In short, as the article explains, the entire state's health care sector has become a giant, state-sized Medicare disaster.

So it's chilling to me that Ann Coulter proclaimed Romney the probable and desirable GOP presidential candidate for 2012, if Chris Christie won't run.

Well, I live in New Jersey, so I see and hear Christie more than most. He isn't finished here, doesn't feel he's actually accomplished what he set out to do, and, frankly, isn't ready for the presidency. And says so.

Romney, on the other hand, is no Ronald Reagan. He lost the 2008 nomination race badly. RomneyCare will continue to dog him. And, frankly, despite how glib, intelligent and presidential he can appear, he still scares me to death as the GOP version of Jimmy Carter. A former governor who is, by and large, a technocrat.

Let's hope a Midwestern governor, perhaps Pawlenty or Daniels, chooses to run.

Thursday, March 3, 2011

Why Public Sector Unions Are Different Than Private Sector Unions- Part 2

Last Friday I wrote this post, which I intended to be fairly comprehensive. But, more recently, I wrote this post on my companion business blog, and realized, as I composed it, that I omitted an important dimension of the public-private sector union differences in that first post.

It became apparent when I wrote this in the more recent post,

"With the rise of hostile takeovers and raiders taking their targets private, or into Chapter 11, many more businessmen learned about the PBGC. The Pension Benefit Guaranty Corporation is the federal agency which is charged with administering the failed, under-funded pensions of bankrupt firms.

The truth is, the private sector has seen, for some thirty years, a series of sectors experience bankruptcies which dumped underfunded pension plans onto the PBGC. At the same time, many other companies switched to defined-contribution plans, terminating their defined-benefit plans and putting the resulting lump sum into the former.

In short, private industry has learned, over the past three decades, that the defined-benefit pensions are, for the most part, illusory and unworkable.

What's happening now is that public sector employees are discovering the same truth. The major difference, however, is that because state and local governments foolishly agreed to these plans, the public sector unions have, as a counterparty, an entity that cannot, as easily as a private sector company, declare bankruptcy and subsequently renegotiate the pension obligations."

From a political perspective, that last paragraph is a gross understatement.

In past decades, when steel, railroad, airline and other heavily-unionized firms finally buckled under the weight of pension and labor costs, they filed for bankruptcy. Pension plans went to the PBGC funded as was.

Simply put, contracts between parties became settled, in breach, in bankruptcy courts. If unions and their members foolishly pushed too hard on a company and helped it become uncompetitive and, ultimately, unprofitable, then they bore the consequences in the form of unmet financial obligations.

Companies are born, and die. Relying on a private enterprise for long term financial obligations is, at its root, risky business.

But making your employment, pension and health care contract with a town, city, county or state is a different matter. Having it written into a state's constitution? You're in clover.

That's why public sector union rights such as collective bargaining are so pernicious and dangerous. When a private company goes bankrupt, it's not news.

But we bridle at towns and states filing for bankruptcy. Cloaking financial promises in the authority of local or state government means that your counterparty risk is much lower than if your employer is a private entity.

I don't know if AFSCME, NEA and SEIU leaders fully understood this thirty years ago, but by the time steelworkers were losing their pension and healthcare benefits, I'm pretty sure they did. Then it was full speed ahead.

Because when they combined the now-commonly understood virtuous- for union leaders- cycle of having state and local government deduct union dues from paychecks and pay them directly to union bosses, who then funded election campaigns of union- and government-spending-friendly candidates, who then created more government (union) jobs with this special counterparty status, it was organized labor heaven.

Notice that nobody is removing the right of a union to collectively bargain on wages. What the Midwestern Republican governors and legislatures want to remove is collective bargaining on work rules and the non-wage and benefit terms which add so much to the cost of public sector administration. For example, Ohio Governor John Kasich noted that a town had to terminate 27 lower-ranked policemen in order to fire a sargeant.

So, take a step back and look at how public sector unions are different in this regard. They don't negotiate with a counterparty which, when overburdened with the onerous costs of the public sector unions' demands, can and will easily just vanish, leaving the union employees out of pocket. No, they are dealing with governmental entities which either can't, or can only with great difficulty declare bankruptcy.

It's a very special situation in which the union and its employees bear very little risk for pushing their demands to the extreme, without a logical counterweight to stop them.

That's why we need to eliminate collective bargaining powers- they aren't rights in the first place- for all public sector union employees.

Wednesday, March 2, 2011

Democrat Capuano Advocates Protesters Get "A Little Bloody!"

Peacefully assembly seems to be in short supply. Consider this, from James Taranto in the Wall Street Journal,

"The rhetoric around Wisconsin's government labor dispute is getting more violent. NHJournal.com reports that Rep. Michael Capuano, a Massachusetts Democrat, said this yesterday at a Boston "solidarity" rally: "I'm proud to be here with people who understand that it's more than just sending an email to get you going. Every once and awhile you need to get out on the streets and get a little bloody when necessary."

The Boston Globe reports that the union crowd responded to Capuano's exhortation with "cheers, whistles and applause."

So much for calls from the left for more civil discourse, now that one of their own is in the Oval Office.

Tuesday, March 1, 2011

Why Collective Bargaining Matters

Most of us think of collective bargaining by public sector unions as mostly affecting staffing. The term "featherbedding" comes to mind. And remarks like those of newly-elected Ohio Governor John Kasich last week on Fox News, to the effect that attempts to fire a police sargeant required getting rid of 27 lower-level officers first.

However, in his recent Wall Street Journal editorial, Oh, To Be a Teacher in Wisconsin (How can fringe benefits cost nearly as much as a worker's salary? Answer: collective bargaining.), Robert Costrell, professor of education reform and economics at the University of Arkansas, explained other unimagined consequences.

Here is his editorial in its entirety:

The showdown in Wisconsin over fringe benefits for public employees boils down to one number: 74.2. That's how many cents the public pays Milwaukee public-school teachers and other employees for retirement and health benefits for every dollar they receive in salary. The corresponding rate for employees of private firms is 24.3 cents.

Gov. Scott Walker's proposal would bring public-employee benefits closer in line with those of workers in the private sector. And to prevent benefits from reaching sky-high levels in the future, he wants to restrict collective-bargaining rights.

The average Milwaukee public-school teacher salary is $56,500, but with benefits the total package is $100,005, according to the manager of financial planning for Milwaukee public schools. When I showed these figures to a friend, she asked me a simple question: "How can fringe benefits be nearly as much as salary?" The answers can be found by unpacking the numbers in the district's budget for this fiscal year:

•Social Security and Medicare. The employer cost is 7.65% of wages, the same as in the private sector.

Public employee protests spread across the Midwest.

•State Pension. Teachers belong to the Wisconsin state pension plan. That plan requires a 6.8% employer contribution and 6.2% from the employee. However, according to the collective-bargaining agreement in place since 1996, the district pays the employees' share as well, for a total of 13%.

•Teachers' Supplemental Pension. In addition to the state pension, Milwaukee public-school teachers receive an additional pension under a 1982 collective-bargaining agreement. The district contributes an additional 4.2% of teacher salaries to cover this second pension. Teachers contribute nothing.

•Classified Pension. Most other school employees belong to the city's pension system instead of the state plan. The city plan is less expensive but here, too, according to the collective-bargaining agreement, the district pays the employees' 5.5% share.

Overall, for teachers and other employees, the district's contributions for pensions and Social Security total 22.6 cents for each dollar of salary. The corresponding figure for private industry is 13.4 cents. The divergence is greater yet for health insurance:

•Health care for current employees. Under the current collective- bargaining agreements, the school district pays the entire premium for medical and vision benefits, and over half the cost of dental coverage. These plans are extremely expensive.

This is partly because of Wisconsin's unique arrangement under which the teachers union is the sponsor of the group health-insurance plans. Not surprisingly, benefits are generous. The district's contributions for health insurance of active employees total 38.8% of wages. For private-sector workers nationwide, the average is 10.7%.

•Health insurance for retirees. This benefit is rarely offered any more in private companies, and it can be quite costly. This is especially the case for teachers in many states, because the eligibility rules of their pension plans often induce them to retire in their 50s, and Medicare does not kick in until age 65. Milwaukee's plan covers the entire premium in effect at retirement, and retirees cover only the growth in premiums after they retire.

As is commonly the case, the school district's retiree health plan has not been prefunded. It has been pay-as-you-go. This has been a disaster waiting to happen, as retirees grow in number and live longer, and active employment shrinks in districts such as Milwaukee.

For fiscal year 2011, retiree enrollment in the district health plan is 36.4% of the total. In addition to the costs of these retirees' benefits, Milwaukee is, to its credit, belatedly starting to prefund the benefits of future school retirees. In all, retiree health-insurance contributions are estimated at 12.1% of salaries (of which 1.5% is prefunded).

Overall, the school district's contributions to health insurance for employees and retirees total about 50.9 cents on top of every dollar paid in wages. Together with pension and Social Security contributions, plus a few small items, one can see how the total cost of fringe benefits reaches 74.2%.

What these numbers ultimately prove is the excessive power of collective bargaining. The teachers' main pension plan is set by the state legislature, but under the pressure of local bargaining, the employees' contribution is often pushed onto the taxpayers. In addition, collective bargaining led the Milwaukee public school district to add a supplemental pension plan—again with no employee contribution. Finally, the employees' contribution (or lack thereof) to the cost of health insurance is also collectively bargained.

As the costs of pensions and insurance escalate, the governor's proposal to restrict collective bargaining to salaries—not benefits—seems entirely reasonable.

After I read this, I asked myself why the Milwaukee school district would have agreed to such lush benefits, such as the taxpayers generously paying the teachers' share of so much of their contributions for deferred pensions. Why would the representatives of the taxpayers agree to pay so much more than the average private sector cost for pensions?

In a free labor market, when compensation rose to these levels in just one sector, more labor supply would come in to enjoy that swollen compensation level, competing it back down to the market average.

That's not happening in Milwaukee, is it? The logical reason would be constricted supply, i.e., the district can't turn to non-union teachers.

So all the Milwaukee taxpayers have to pay much more than normally-competitive compensation just because a union is the only source of supply for teachers.

Why is that a good thing?

It's clearly not.

Monday, February 28, 2011

Public vs. Private Sector Compensation

Since the teachers in Wisconsin illegally walked off of their jobs to spend more than a week protesting the state legislature's consideration of governor Scott Walker's bill to repeal their collective bargaining rights, more news stories and editorials have been appearing detailing how much better compensated public sector workers are, on average, than those in the private sector.

For example, Karl Rove wrote in a Wall Street Journal editorial last week,

"The growth of public- employee unions has paid off handsomely for some. The BLS reports the average annual wage for a state-government employee is now $48,742, but $45,155 for a worker in the private sector. What's more, the Bureau says the cost of benefits for state and local government workers has risen 50% more than those for private-sector employees since 2001."

In another Journal editorial in that same edition, Andrew Biggs and Jason Richwine refuted "a study released last October by the Center on Wage and Employment Dynamics at the University of California, Berkeley, which concluded that Golden State public employees "are neither overpaid nor overcompensated."

In their piece, they identified and corrected numerous errors in the Berkeley study,

"But our research shows that the study underestimates what public workers receive from pensions and retiree health programs. It also doesn't account for the value of job security in government employment. Once these are noted, the balance tilts clearly in favor of public workers.

The first error in the Berkeley study concerns defined-benefit pension plans. The study erroneously conflated what governments pay into defined-benefit plans with what workers will eventually receive in retirement. So if governments contribute 10% of employee pay to defined-benefit pensions while private employers contribute 10% to 401(k)-type pensions, these studies conclude that pension compensation is equal.

But here's the problem: State and local pensions effectively guarantee employees an 8% return on both their contributions and those made by their employer. By contrast, a private-sector employee with a 401(k) can achieve a guaranteed return of only around 4% by investing in U.S. Treasury securities. Most economists believe governments are foolish to base their funding decisions on the assumption of high investment returns, but the benefits for public employees are guaranteed in any case.

Over a career, the difference between a 4% and 8% return is significant. Using data from California's major pension funds, we calculate that the higher implicit return on public pensions increases the compensation of California's government workers by around 4%.

The Berkeley study's second error is the omission of retiree health benefits. Private workers retire later and relatively few receive retiree health coverage. For those who do, eligibility has been tightened and premiums increased. But almost 90% of state and local governments offer retiree health benefits to employees. They generally retire in their 50s, at which point the government often pays most of their costs, including Medicare premiums and deductibles.

State actuarial reports show the annual cost of California retiree health benefits could top 8% of total compensation. Thus an accurate accounting of pension and retiree health benefits shows that public employees in California are paid about 15% more than individuals working for large private firms (accounting for age, education, etc.).

Another major benefit of public employment is job security. The Bureau of Labor Statistics reports that, on average, a private worker has about a 20% chance of being fired or laid off in a given year. In state and local government, the discharge rate is only about 6%—and several studies have found that public employees are more risk-averse than other workers, meaning they place particular value on job security. We estimate that government job security is equivalent to about a 15% increase in compensation.

Overall, our research suggests that government workers in California are compensated up to 30% more generously than are similar employees in large private firms. And the California experience is similar to that of other large states with powerful public unions. Elected officials are right to reassess public worker compensation as they try to close their budget deficits."

I've highlighted the crucial passages summing up the extra earnings of the California public sector workers in blue. The total is eye-popping, isn't it? An extra 30% compensation, and job security, too.
I believe if more of Wisconsin's, and the nation's voters understood these financial comparisons between public and private sector workers' total compensations, no state would continue to allow collective bargaining for the former. And compensations for those public sector workers would begin to be linked to private sector averages.