The Magazine

The Unions Go to Town...

...and bankrupt America's cities.

Mar 24, 2008, Vol. 13, No. 27 • By STEPHEN MOORE
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Plenty of cities outside California are facing a similar tsunami of debt thanks to years of super-generous labor agreements. The ten largest Chicago-area cities face a combined $18.7 billion in unfunded pension liabilities, according to a new report by the Chicago Civic Federation. The city of Chicago has less than 50 percent of the money it needs to pay the benefits promised to Chicago police and firemen. Philadelphia was forced to issue a $4.5 billion bond in February to cover unfunded pension liabilities for 33,000 retirees. The total cost to states for paying for all teacher retirement health and pension obligations is now estimated at $3 trillion, and growing each year.

As California taxpayers wake up to the enormous future tax increases they and their children face to pay for expansive promises to city, county, and state workers, they're wondering, says Frates, "how did they get these sweet deals?" There lies the real scandal. For years, even decades, the only people who've cared much about public employee salaries are the public employee unions. The politicians who sit across the table and negotiate with the union bosses have little if any incentive to drive a tough bargain. The costs won't be visible until the politicians who negotiated them are long gone.

Donna Arduin, a former California budget director, explains another reason deals that border on swindles keep getting done: "The public employee unions are far and away the most powerful special interest in the state. They run the state and virtually no politician will stand up to them." She remembers being physically threatened one year when the state was broke and she tried to trim a $400 million bonus in the pensions for corrections officers: "I had to fear for my life."

Nationally, public employees now receive $39.50 an hour in wages and benefits. That's a 50 percent premium over the $26.09 average salary and benefits for private sector workers, according to 2007 Bureau of Labor Statistics data. The gap keeps widening each year. It's true that public employees are more likely to be in white-collar occupations, which receive higher pay, but it's also true that government workers receive a benefit that almost no one in the private sector gets: near 100 percent lifetime job security thanks to arrangements like teacher tenure and government no-fire rules.

In California, taxpayer watchdog groups like the Howard Jarvis Foundation are starting to fight back against the public employee unions. These groups are mobilizing to put an initiative on the ballot called "Proposition 13 for Pensions." It would simply require public employees to work until the age of 65 before they can receive retirement benefits. That's standard fare in the private sector, and the reform would save the state of California and its localities an estimated $500 billion through 2030. No surprise that the unions have pledged to spend millions of dollars to defeat the measure.

The more sensible long-term solution is for cities to immediately abolish these anachronistic guaranteed "defined benefit" pension systems and convert public employees to portable and cost-constrained 401(k)-type pensions. "In the private sector, defined benefit pension structures are rapidly becoming extinct," says financial analyst Dan Clifton of Strategas, a Wall Street advisory firm. "Pretty much only the government still offers them."

But the unions have plenty of political firepower to preserve their pension empire. This year public employee unions are expected to spend $50 to $100 million on political campaigns--as they've been doing for years. No wonder that many politicians behave like fully owned subsidiaries of the unions. So the luxurious benefits of public employees grow more unaffordable each year while the states and cities keep edging closer to the fiscal cliff. Bankruptcy may be their only recourse. Just ask the folks in Vallejo, California.

Stephen Moore is senior economics writer for the Wall Street Journal editorial page.