Economics

How Public Employees and Taxpayers Got Scammed

The politicians are the real problem.

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Public employees have been cramming the Wisconsin state Capitol to protest the governor's plan to cut their take-home pay and gut their collective bargaining rights. You can't blame them for objecting when the state reneges on a deal. But they should have been protesting years ago, when politicians and union leaders struck a bargain that was too good to be true.

Government workers have long accepted a tradeoff. They get lower pay than they might get in the private sector, but better retirement benefits. They give up some current luxuries for more security later on. The great majority of them have pension plans with guaranteed payouts—an option that has largely disappeared from the private sector.

Most businesses long ago abandoned defined-benefit plans because they were unaffordable. The public sector has stayed with them, though—apparently to prove those private companies right. State and local governments, according to pension expert Joshua Rauh of Northwestern University, have promised $3 trillion more in benefits than they have set aside to pay for them.

Why? Because there are powerful incentives for both legislators and union leaders to do that. Politicians (particularly, though not exclusively, Democratic ones) want to ingratiate themselves with unions, whose members can be a huge help on Election Day. Union leaders want to keep their members happy and return their favored elected officials to office.

The problem, of course, is that such generosity costs a lot of money, which taxpayers may resist paying. That's where the back-loading of compensation comes in.

Promising government workers excellent retirement plans, off in the future, gratifies union members without outraging the taxpayers. The burden is postponed until some future date, which makes the process painless—until the future arrives.

Wisconsin is a typical state, with more than $45 billion in unfunded obligations by Rauh's calculation. Taken as a percentage of gross state product and state revenue, he informed me, that makes it about average or "maybe slightly worse."

But the phenomenon is a national one. Though Republican Gov. Scott Walker has targeted union negotiations, the same problem exists in states where public employees lack the collective bargaining rights at issue in Madison. South Carolina, Alabama, and Mississippi are among those, and their unfunded obligations loom even larger than Wisconsin's.

If collective bargaining gave too much power to public employee unions, you might expect states that mandate collective bargaining to have lower unfunded obligations—because the unions would be able to demand full funding. But that's not the case.

Union-friendly Illinois is one of the worst states in the country in shortchanging the public employee pension system. Over the years, elected officials have cut the state's contributions, diverted funds to pay other expenses, and borrowed money to cover current pension obligations. But no mobs of teachers and police officers descended on the state Capitol to protest, because they didn't grasp the implications.

Now we can all see the damage done. Though public employees have paid their share, the state has failed to keep up its end of the bargain. So in Illinois, as in Wisconsin and many other places, there is a conflict between what they were promised and what the citizenry is prepared to pay.

Government workers and taxpayers are both victims of this scam, which allowed extravagant pledges that don't have to be redeemed until later—by which time the governors and union officials who devised them are gone, leaving someone else to cash the check.

In the private sector, these shenanigans would never be tolerated. Public pension systems get to assume implausibly high returns on their investments, which gives the impression they can meet their future needs.

The looser rules "allow governments to base their budgets on economic fictions," writes Orin Kramer, who oversees investments for the New Jersey system, in The New York Times. You could even call it fraud.

Republicans in Congress are trying to prevent deception by requiring public pension systems to follow the same basic rules as corporations. Politicians hate the idea for the same reason the rest of us—government workers included—should welcome it. As Moody's Investors Service said in endorsing the plan, it would "provide new incentives to state and local governments to take action to ensure public-employee pension plans' long-term viability."

Creating incentives for governments to behave honestly and responsibly? It's a new concept, but it might be worth a try.

COPYRIGHT 2011 CREATORS SYNDICATE, INC.

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68 responses to “How Public Employees and Taxpayers Got Scammed

  1. Please. If the unionists got “scammed,” it was by their own representatives, who knew that nothing beyond their own personal advancement could ever come of plainly impossible financial agreements.

    By the way, I see that Madison Teachers, Inc., is screeching criticism of the pernicious influence of corporations on American politics. Every last one of those fucking unions is a rent-seeking corporation no different from any other rent-seeking corporation.

    Will people please start calling the union corporatists out on their greedy corporate profit motives?

    1. “If the unionists got “scammed,” it was by their own representatives”

      Couldn’t you say the same about taxpayers and their representatives? The average NEA member has about as much influence on the NEA president as I have on the governor of my state.

      1. Well, that pretty much goes without saying. Perhaps the Tea Party candidates that got elected will prove different?

        1. Don’t hold your breath. Besides, even if they prove to be honorable, they are a small minority.

    2. If the unionists got “scammed,” it was by their own representatives

      Exactly. Taxpayers got scammed by the politicians. Union members got scammed by their own leaders. The politicians who approved these deals and union leaders who pushed for them are both complicit.

    3. If the unionists got “scammed,” it was by their own representatives

      Union representatives are politicians.

    4. We all got scammed. Look in the mirror and ask yourself why we never held the politicians accountable and they got worse over time. We have the government we deserve and now we have to eat it. But hey, we were brainwashed to believe we live in the best country in the world.

  2. The State of NJ has its own investment team for the state pension fund. They do not farm out to an asset management company, like most states. I would really like to know just exactly with which companies they are investing, if any of those companies are located in NJ, and if those companies are getting any special breaks from the State.

  3. In the private sector, these shenanigans would never be tolerated.

    Huh? The Big Three did this for decades. That’s the reason they asked for a bailout, and keeping those unions happy is the reason politicians gave them one.

    1. The airlines did it, also.

      1. And the railroads. Big unions have pretty much destroyed any industry they touched.

        1. Didn’t the taxpayer get stuck footing the bill on those failed pension funds? Isn’t there some government pension insurance fund, like the FDIC, that gives recipients 40 cents on the dollar, or something?

          1. Yes, the Pension Benefit Guarantee Corporation. Although I think part of the deal is that companies have to pay premiums to insure their employees pensions. I don’t know if those premiums are acturarily sound though- probably not.

        2. Don’t forget the banks and credit companies. Look how the unions ruined them and stuck the taxpayers with the bill.

          1. In this basket –> apples

            and

            in this basket –> oranges

            (Your comment does not appear to be written in an English script. Please comment in English.
            Whoa, that’s a new one)

            1. (Your comment does not appear to be written in an English script. Please comment in English.
              Whoa, that’s a new one)

              Fucking racist spam filter.

          2. Do you understand that because an implication goes one way, that does not mean the opposite implication must hold? This is pretty basic logic.

          3. union tellers? did i miss something…

            1. You bankers will approve loans as I see fit. Or else.

          4. Don’t forget the banks and credit companies. Look how the unions ruined them and stuck the taxpayers with the bill.

            No union involvement needed there. The government was regulating them.

        3. Big unions have pretty much destroyed any industry they touched.

          Except for professional sports and Hollywood.

          1. Which is a tribute to the stupidity of the masses (even though I defend their right to spend their money stupidly, as long as it’s not my tax money…)

            1. how gnostic of you.

          2. Wrong. When is the last time you paid for a ticket to a professional sports event? These people’s over inflated salaries are the reason I will never attend another pro sports event.

            1. About 40 years ago!

        4. And the railroads. Big unions have pretty much destroyed any industry they touched.

          This. They’ve turned the Rust Belt into the Dust Belt.

          1. Camden, NJ, as well.

    2. Yeah, because Japanese and German automakers don’t have any government intervention or unions!

      1. Sure they do. BTW, aren’t their biggest profit centers the non-unionized plants in the USA?

        And, the Japanese companies have almost exclusive rights to sell cars in Japan through “barrier to entry by foreign competition” laws in their country.

        1. Hey, at least they’re making cars in America unlike GM which makes most of them in Mexico and Canada. “Imported from Detroit” my ass.

          ISRATINE AND OTHER FUN FACTS ABOUT QADAFFI.
          http://libertarians4freedom.bl…..about.html

      2. You realize that Toyota, BMW and most of the other foreign car plants in America aren’t unionized, right? I wonder why that is?

      3. When and uneducated Chinese rice planter/picker can do your job….you need a union.

        1. To protect you from reality.

        2. When and uneducated Chinese rice planter/picker can do your job….

          you’re ultimately hosed no matter what.

        3. Nope. At that point, you need a legislator to mandate that people buy your stuff or nothing.

    3. yeah, how did this get into the article?
      how about USX formerly US Steel? back in ’77 i had a friend who worked over the summer pushing a broom for $12.50/hr. at the steel works. that was back at a time when minimum wage was $3.15. he thought he was king pooh-bah, and i’m sure his daddy was so happy he helped his son fill a needed position at his work. taught him also the system works, too.

    4. Woah, TheOther Some Guy, a little credit where credit is due, eh?

  4. Admitting to being scammed would be admitting they aren’t the End Product of Human Intellectual Progress, and thus not more intelligent than the rest of us. It will never happen.

  5. Here’s a classic dilemma: You can go back in time, and assassinate two people in order to save millions. Your potential targets are Hitler, Stalin, or John Dewey (the father of our modern educational system). Which two do you pop? I know, it’s a tough one…

    1. Would killing Hitler have stopped Nazism? Probably.

      Would killing Stalin have stopped Communism in Russia? Probably not – some other bastard in waiting would have probably taken up the “cause”, although maybe with a little less slaughter.

      Sorry, Mr. Dewey…

      1. Actually, I wonder about that with Hitler. In fact, Germany may have done a lot more damage if Hitler was not so fanatical about killing Jews and other easy targets. He routinely ordered men off of the front lines and put them as well as heavy resources into eradicating people. It might have been the very thing that saved Europe, as grotesque as that sounds…

        1. There is an argument to be made that keeping Hitler in power ultimately won the war for the Allies.

          But, considering who would have replaced him – Goering or Himmler – I’m not so sure they would have done any differently – or better – than Hitler.

          1. My understanding was that WWII would have occurred sooner or later without Hitler. Now would this new leader have pushed into Russia in the winter is a bigger question.

            What if you killed FDR? Would have this “Great Society?” Would we have gotten into WWII sooner or not at all?

  6. Government workers have long accepted a tradeoff. They get lower pay than they might get in the private sector, but better retirement benefits.

    Since on average private schools pay teachers less than public school, that’s a pretty good trade off. I don’t know what the private sector equivalent to DMV worker would be.

    1. I don’t know what the private sector equivalent to DMV worker would be.

      Probably customer support for a cable company… if that even counts as private sector.

    2. Probably an exceptionally sadistic dominatrix would be a rough equivalent, though many people who experience the DMV would prefer to be hung upside down and flogged with a bull-whip.

  7. “The politicians are the real problem.” And who the fuck elected them???

    1. Not I. All the people I voted for at the last election lost.

      1. Stay away from the horses then.

  8. I don’t know what the private sector equivalent to DMV worker would be.

    Walmart greeter? Clerk at The Limited?

  9. Love the pic of those striver poor hipster college students. Have fun facing reality when you get your worthless degree and $35K in student loan debt, you ‘tards. Your mediocre selves are going to be back in mommy and daddy’s basement soon, wondering where it all went wrong and why life hasn’t provided you a do-over like they did in kindergarten.

  10. I truly wonder what all of this will look like in about 5-10 years when the boomer retirements hit high gear and the states announce, “Oh yeah, we can’t pay you that pension we promised you.”

    1. Soylent green!!!

  11. Just in case it hasn’t been posted on any of the union-related threads:

    http://www.youtube.com/watch?v…..r_embedded

  12. A friend and I thought of an interesting solution to CA’s union problem. Why doesn’t the CA gov’t just issue bonds in the amounts owed to the pensioners, due at the time of retirement. This would allow workers to diversify their portfolio away from the health of CA’s budget. It would also give unions some skin in the game to keep CA solvent, because the value of those bonds is correlated to CA’s solvency – note that the price of these bonds has droped 12% since November:

    http://www.google.com//finance…..NCA&ntsp=0

    Thoughts?

    1. Seems like just another can-kicking scheme to me. The bond has to be paid with interest, so it’s ultimately going to cost the taxpayers more than the price of the bond anyway to pay that off. Secondly, to even get a “kiss from your sister” benefit to all of this, you’d have to make the payment of the bond contingent upon the recipient remaining a California resident–no more cashing out and moving to lower cost states while the state taxpayers foot the bill for you to NOT spend money in the local economy.

      I just don’t think it’s a realistically workable solution.

  13. There is another aspect to the “deal.” As the article says, the “trade off” for public employment was lower salaries for job security and non salary benefits like more time off and pensions. That was certainly the case when I came out of school. But the unions were unhappy with the lower salaries. They were the ones who, through bargaining and legislation, demanded that their salaries “catch up” to the private sector. But they refused to sacrifice “their” benefits – so salaries caught up to private sector levels while public employees kept their superior benefit packages. Worse yet, because increased salaries increased the value of pensions and paid time off, the benefit packages became even more costly.

  14. This has been my thought for a long time, everyone’s just happy as a dung beetle in a cow pen till the bill comes due, then it’s always an outrage and generally someone else’s fault. People are like that in their private purchases, in their jobs, their voting, in pretty much everything. Employees, employers, voters, politicians, they’re all happy to promise more than they can give and the other side is willing to take it, but when something has to be done because it’s time to pay for it whoever has to make the hard choices is the asshole.

    Everyone knew where this would eventually lead, just like with SS and Medicare, just like with Medicaid, just like with housing block grants and welfare, but as long as times were good everyone was willing to let the bill pile up. Now they all insist the other guy is who should pay for it and they’re all standing in a circle pointing at each other.

  15. Very good article, but I twitched noticeable every time the author used the phrase “government /workers/”.

  16. “Government workers have long accepted a tradeoff. They get lower pay than they might get in the private sector”

    That might have been true 50 years ago but it sure ain’t now.

  17. “They get lower pay than they might get in the private sector, but better retirement benefits”

    I know liberal propaganda does indeed claim that government workers received lower pay at one time. The question is, was that ever actually true? Did a government clerk actually receive a materially lower salary than a private sector clerk? I’ve never seen a real study on the matter.

    1. And you never will. This particular piece of propaganda has nothing to do with those at the bottom of the pile and everything to do with those at the top. Politicians and senior bureaucrats always spin the line that they’re under-paid in comparison to the private sector. This presumes they could actually attain those equivalent private sector jobs but, the reality is they wouldn’t because of their inability to grasp the concept of “the bottom line”. These people simply couldn’t run a “for profit” business, which is why they end up working for the government.

      Some say “If you pay peanuts, you’ll only get monkeys”. I say “If they act like monkeys, they should only get paid peanuts”. But, unfortunately the government pays itself so it’s no surprise they get a lot more than they should. Maybe this crisis will change things but I doubt it.

      1. That makes a lot of sense.

  18. Finally, a readable HuffPo column:

    http://www.huffingtonpost.com/…..27285.html

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