Public sector unions use politics to suit their interests, and in doing so they create the incentive for politicians to kick the can down the road. When politicians have the choice between raising taxes and cutting benefits for public sector employees, they choose to ignore both, according to a new Beacon Hill Institute at Suffolk University study, “The Public Sector ‘Union’ Effect: Pushing Up Unfunded Pension Liabilities and State Debt.” Instead, they borrow for promises they cannot keep.
For instance, just under 50 percent of public sector employees in Illinois are unionized. Our study attributes $50 billion of Illinois’s $136 billion public debt to the prominence and power of public sector unions. In addition, we link Illinois’s powerful unions to poor planning by the state to pay for its unfunded liabilities—the promises to pay pensions and retiree health benefits in the future.
The Pew Center on the States gave Illinois its worst rating based on how well it funds these liabilities, which is no surprise as Illinois has the 13th highest percentage of its public sector employees unionized among the 50 states. The Pew study concludes that, as of fiscal year 2010, there was a $1.38 trillion dollar gap between states’ assets and what they have promised to pay.
These conclusions follow a two-part study establishing the link between the presence of public sector unions and poor state fiscal governance. Americans witnessed the struggles of Wisconsin in 2010 to overcome this force—and with the unions stripped of their power, Wisconsin is the only state to have fully addressed both unfunded liabilities, as evaluated by Pew.
$78 x State’s Population
Now we can put a dollar figure on the unions’ effect. For each percentage point of public sector employees who are unionized, the state and local government debt per capita will be $78 higher. In other words, if the percentage of public sector employees who are unionized increases from 25 percent to 26 percent, we would expect debt in the state to increase by $78 multiplied by the population of the state.
In the second part of our study, we quantitatively linked the presence of public sector unions with poor management of unfunded liabilities. Evaluating unfunded liability management is a project in and of itself, and we trust Pew’s evaluations.
For both pensions and retiree health benefits, Pew rated each state’s management as “serious concerns,” “needs improvement,” or “solid performer.” Using these evaluations, we created an index from 0 to 4, with 4 being the highest rating. A state with a 4—like Wisconsin—is a solid performer in both pensions and retiree health benefits. A state with a 0—such as Illinois—has serious concerns regarding both. A state with a 1 has serious concerns in one area and needs improvement in the other. We consider a 0 or 1 to be a very poor rating, demonstrative of refusing to take the issue of unfunded liabilities seriously.
We show a one percentage point increase in the percentage of public sector union employees makes a state about 1 percent more likely to receive a very poor rating. The percentage of public sector employees who are unionized ranges from 8.8 percent in North Carolina to 71.1 percent in New York. With such great differences in unionization rates, one should expect public sector unions to have a tangible, visible impact on how well unfunded liabilities are addressed.
High Unionization, Big Debts
North Carolina is an example of a state that has its finances in order. Pew approves of its management of pensions while noting it needs improvement in its plans for retiree health care obligations. (Again, only Wisconsin receives approval of its management of both.) North Carolina carries only about $5,400 in state and local debt per capita, 12.8 percent of which we attribute to public sector unions.
In comparison, 58.7 percent of California’s public sector employees are unionized. Both its pensions and retiree health care benefits raise serious concerns. Its debt per capita is about $10,700, just short of double that of North Carolina. (Multiplied by its vast population, California’s public sector debt is $173 billion.) We estimate 42.8 percent of California’s debt is the result of its public sector unions.
These examples illustrate what happens when states fail to curb the power of Big Labor, reforms recognized as necessary in the private sector decades ago.
Misplaced Blame on Economy
Defenders of public sector unions blame the financial crisis for this mess. Although economic growth rates are not what they once were, the stock market has already returned to its previous heights and unfunded liabilities still look like a crushing problem. Moreover, if the financial system is still placing an undue burden on the US economy, we certainly cannot ignore that when making decisions regarding state finances.
States with an unfunded liability problem tend also to be the ones with a public debt problem, as both issues are caused in part by public sector unions. Leaving unfunded liabilities unaddressed will force drastic increases in tax rates or cuts in basic services. And because these states are heavily indebted already, there will be little wriggle room when budgets become undone.
Wisconsin is the example to follow for states that want to manage their finances responsibly. Concerned citizens and policymakers have an obvious place to look when searching for a culprit for poor state fiscal management: powerful public sector unions.
Ryan Murphy ([email protected]) is an economist at Suffolk University and a research assistant at the Beacon Hill Institute.
“The Public Sector ‘Union’ Effect: Pushing Up Unfunded Pension Liabilities and State Debt,” Beacon Hill Institute: http://heartland.org/policy-documents/public-sector-union-effect-pushing-unfunded-pension-liabilities-and-state-debt