It’s a story that’s playing out across the country - cash-strapped governments are scrambling to balance their budgets while hamstrung by the contracts of current and retired public union workers. The situation has led to demonstrations, legislators fleeing their states, and harsh words from both sides.

The details differ from state to state, but governments are finding themselves facing the same fundamental financial challenges brought on by generous union contracts. In Wisconsin, the primary issue involves collective bargaining rights, in Idaho teacher tenure is a sticking point, and in New York, pension obligations are a major concern. As states try to fill budgetary gaps, they have little maneuvering room because of existing agreements with public sector union members. Without the ability to renegotiate contracts or get concessions from unions, governments are left to increase their tax rates and cut services. And the consequences for businesses and their private-sector employees are becoming steeper all the time.

While proponents of public sector employees complain that teachers and emergency personnel are being scapegoated, the salaries and benefits of public sector union workers have a very real impact on taxpayers. According to recent data analysis by Andrew Biggs, resident scholar of the American Enterprise Institute for Public Policy Research, and Jason Richwine, senior policy analyst of the Heritage Foundation, federal workers are overpaid by private sector standards. “We conclude that the total federal pay premium - combining cash wages, fringe benefits, and job security - is approximately 39 percent, or nearly $60 billion annually,” they noted in a recent report.

It’s not just federal employees, either. In another report, Biggs and Richwine found that government workers in California receive up to 30 percent more compensation than similar, private sector employees. “And the California experience is similar to that of other large states with powerful public unions,” they noted. “Elected officials are right to reassess public worker compensation as they try to close their budget deficits.”

PUBLIC VERSUS PRIVATE UNIONS

Public sector unions have grown stronger, even as fewer private sector workers participate in unions. According to the U.S. Bureau of Labor Statistics, in 2010, 36.2 percent of federal government workers, 26.8 percent of state government workers, and 42.3 percent of local government workers belonged to unions. Meanwhile, only 6.9 percent of employees in the private sector reported being members of a union last year.

That marks a dramatic change from a few decades ago. In 1945, nearly 40 percent of private workers were union members, while 9.8 percent of public employees belonged to a union.

Traditionally, working in the public sector represented a trade-off. Workers may have made less in salary than their private sector counterparts, but they had job security, early retirement options, and attractive benefits. However, as public sector unions grew larger and became more powerful, many public sector union members began enjoying the best of both worlds. They kept their contract-mandated salary increases, even as they retired much earlier than those in the private sector, and received generous pensions, free or reduced health care, and other perks.

The unions themselves became large enough and sufficiently funded to become real political players. All of this has helped set the stage for the current showdown between taxpayers, governments, and unions.

• When Money Equals Power
Some public-sector unions, particularly teachers unions, donate huge amounts of money to political candidates, creating concerns about cozy relationships with politicians.

According to the Center for Responsive Politics, in 2010, the National Education Association (NEA) made $2.4 million in political contributions; in the 2008 election cycle, that figures was $2.5 million. In total, the NEA has donated $32 million to political candidates since 1990. In all but one election cycle in the last 20 years, more than 90 percent of the money went to Democratic candidates. The American Federation of Teachers (AFT) donated $2.7 million to politicians in 2010 - all of it to Democrats - and $2.8 million during the 2008 election cycle, with 99 percent going to Democratic candidates. Since 1990, the AFT has donated a total of $29 million to political campaigns.

This amount of money can raise questions about whether elected officials are acting in the best interests of businesses and citizens or whether well-funded public sector unions enjoy favorable access and advantages.

Consider the situation in Illinois. Facing a $15 billion budget deficit, the state’s General Assembly passed a 45 percent corporate tax increase and a 66 percent income tax increase in January. But while the state can raise taxes, it cannot lay off any members of the American Federation of State, County, and Municipal Employees Council 31. That’s because, in the midst of his reelection campaign last year, the Democratic governor Pat Quinn signed an agreement with the union promising no layoffs or facility closures until the end of June 2012. If the state does lay off any employees, they will have to be non-union workers.

• Collective Bargaining Rights
In Wisconsin, collective bargaining rights for public unions have been a major sticking point. Wisconsin governor Scott Walker, in taking on the collective bargaining rights of his state’s public sector employees, has pointed to the highest-paid employee in the city of Madison. In 2009, it was a bus driver who earned $159,258. That included $109,892 in overtime, which was guaranteed as part of the union’s collective bargaining agreement. The bus driver was one of seven in Madison who made more than $100,000 per year in 2009.

According to Walker, who is trying to close a $3.7 billion budget deficit, the teachers’ collective bargaining agreement alone costs Wisconsin taxpayers $101,091 per teacher per year. It also means teachers don’t contribute a dime for health-insurance premiums and requires schools to hire and fire based on seniority and union rules, rather than merit.

“We are reforming the way government works, as well as balancing our budget,” he has announced. Walker said in a statement in March, “Our reform plan gives state and local governments the tools to balance the budget through reasonable benefit contributions. In total, our budget-repair bill saves local governments almost $1.5 billion, outweighing the reductions in state aid in our budget.”

For weeks, protestors turned the statehouse in Madison, Wis., into a circus while they railed against Walker’s actions to balance the budget. Although Walker’s actions set off a firestorm of protests, many states do not grant their workers any collective bargaining rights.

According to the General Accounting Office, nearly 7 million federal, state, and local government employees have no collective bargaining rights. Twelve states essentially have no laws for collective bargaining among state and local employees. Another 12 states allow collective bargaining rights for some workers, such as teachers or firefighters, but not for others. Another 26 states and the District of Columbia allow collective bargaining rights for their employees. (However, this report has not been updated since several state legislatures, including Wisconsin, began working to minimize or eliminate collective bargaining among public sector workers.)

• Pensions
Pensions have also become major financial burdens for states looking to balance their budget. Obviously, not all the public sector employees who receive pensions belong to unions, but those in unions often tend to have more muscle when it comes to negotiating and protecting pension benefits. According to some estimates, governments across the country have $1 trillion in unfunded pension liabilities.

Atlanta alone has an unfunded pension liability gap of $1.5 billion. “The costs of maintaining and funding the pension plans account for close to 20 percent of the city’s annual budget and continue to rise,” the city’s Pension Review Panel found. “The city currently does not have funding to meet about 47 percent of its pension liability. These increasing costs are unsustainable.”

In New Jersey, pensions and benefits for state and municipal workers are also becoming a burden on the government. Speaking before the New Jersey Assembly Budget Committee, Chuck Chiarello, president of the New Jersey League of Municipalities, cited the impact that pensions and benefits are having on local property taxes in the Garden State. “In September, the Division of Pensions and Benefits informed us that local government pension contributions would go up by an average of 22 percent this year. And State Health Benefit Plan costs are slated to climb by 11.7 percent,” he testified. “These costs are putting local budgets into a death spiral.”

Even the New York Times has called on the state’s public union employees to compromise their benefits, particularly pensions, in order to help balance the budget. “…New York State is paying 10 times more for state employees’ pensions than it did just a decade ago,” according to an editorial that appeared in March. “That huge increase is largely because of Albany’s outsized generosity to the state’s powerful employees’ unions in the early years of the last decade, made worse when the recession pushed down pension fund earnings, forcing the state to make up the difference.”

As state, local, and the federal governments strive to balance budgets in an economy that is still struggling, companies need to keep a careful eye on how exactly those holes will be filled. If public sector unions don’t step up to do their part and share in the sacrifice, governments will have limited options. They can take on the unions directly, which can be difficult and politically dangerous. Or they can try to raise money through higher taxes, which will hurt businesses and their private sector employees, who have already suffered in this difficult economy.

Publication date: 04/18/2011