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Monday, January 10, 2011

How to Talk Civilly about Public Employees' Pensions: A Conservatives' Guide

It is now a staple news item that the political winds have shifted against public employees: Everyone -- from Democrats like N.Y.'s Andrew Cuomo to Republicans like N.J.'s Chris Christie -- is piling on, while conservative onlookers cheer.

As readers of this blog may know, I tend to think that this scrutiny of public labor costs is a good thing. But even a good thing can spawn a lot of petty, misguided invective, and there has been no shortage of mean-spirited vitriol cast at public sector unions during this latest set of subnational budget crises.

So, after the jump, here are three rules I observe when talking about public-sector pensions that, I hope, help me steer clear of some of the more histrionic tropes of anti-union rhetoric without compromising on what generally is regarded as my conservative sympathies for cutting back on this budget item.


1. Rule #1: Avoid question-begging comparisons with the private sector.: It is now a standard line that public-sector workers' pensions are larger than those of their private-sector counterparts. In conservative circles, this is taken to be prima facie evidence that the public-sector worker is overpaid. But, of course, one could just as easily conclude from the same comparison that a demoralized, de-unionized, private-sector labor force is under-paid in deferred compensation.

Take, for instance, the fact that public-sector workers are more likely to receive defined-benefit plans rather than defined-contribution plans. This fact can be proffered to show that the public sector is getting a sweet deal. But switching to defined-contribution plans (as Michigan did for its public employees) is not an unadulterated benefit: As Michigan discovered, such a switch can create a class of economically insecure retirees who no longer act as economic anchors for their communities.

In short, one cannot derive an "ought" of proper pay from the "is" of either private or public salaries. One needs a normative theory of proper compensation before one can conclude that public-sector pensions should go down rather than concluding that private-sector pensions should go up.

Rule #2: As a general matter, governments' pension liabilities should be treated with the same respect as other future liabilities based on governmental promises such as bonded indebtedness. Since the days of the Federalists, most conservatives take the contract clause of Article I, section 10 pretty seriously and believe that governments should pay their debts rather than default on their bondholders, even when the debts were issued for silly purposes. Conservatives should extend the same courtesy to pension obligations created by collective bargaining agreements: If conservatives would be leery about a governor's unilaterally announcing that their state will not make a scheduled bond payment, then conservatives ought, to precisely the same extent, be queasy about governors' announcing that they are re-negotiating their governments' pension obligations.

Parity for bonds and pensions does not mean that the latter can never be re-negotiated. At least 173 years of doctrinal and constitutional protections for popular sovereignty have led to strict limits on subnational governments' liabilities to bondholders and other investors. Since Taney's 1837 opinion in Charles River Bridge Case, it has been the general view that subnational governments are not bound by contracts with investors unless those contracts unmistakably impose an obligation on the government. This "unmistakability doctrine" equally limits governmental exposure to non-vested pension liabilities. The cases are legion that, prior to a pension's vesting for a particular employee, most governments' general commitments to pay pensions (or other deferred compensation) do not amount to unmistakably clear commitments not to re-negotiate such compensation for future retirees under Article I, section 10. (For a typical example, see the First Circuit's McGrath decision).

State courts have reached varying conclusions about how "unmistakable" a collective bargaining agreement must be to qualify as a binding commitment not to modify non-vested pension liabilities under their respective state constitutions. The important point is that conservatives who feel solicitude for re-paying bondholders cannot consistently bay for default on public-sector unions' collective bargaining agreements: We conservatives need a similar attitude towards both sorts of future liabilities.

Rule #3: The strongest objections to the pension liabilities created by agreements with public-sector unions are process-based, not substance-based, objections. It is common to argue that public-sector pensions are "too high." The difficulty with this sort of rhetoric (as I have observed before) is that market society gives us precious little practice in figuring out what constitutes a "just wage," deferred or otherwise. "Should" New Jersey cops draw a median pay of $90k -- that is, more than the pay of most White House policy analysts? As a moral matter, I guess it depends on whether they are risking their lives on the beat or writing traffic tickets from those little three-wheel scooters. It also depends on what sort of stimulus boost New Jersey will enjoy from high public-sector pay and a myriad of other factors that are essentially impossible to evaluate. In short, moralistic rhetoric about high compensation is essentially meaningless, because there is no benchmark for a "just wage" in a market society.

There are, however, criteria for sensible compensation-setting procedures. In competitive labor markets, that procedure is competition among employers: we normally operate according to the principle of "to each according to his threat advantage." I do not worry whether I, as a NYU law prof, make too much money, because, if my current or prospective students do not want to pay what I make, then they can easily enough transfer to, or accept offers from, Columbia, Fordham, Brooklyn, or Cardozo. The competitive nature of the law school business absolves me of the need to justify my pay, given that students can vote with their feet.

There is less foot-voting in the public sector, requiring some alternative process by which to set deferred compensation. The current procedure involves public elections of officials who negotiate on behalf of service consumers with service providers. This process works fine for highly visible officers -- say, the President or Attorney General or Congress -- because such salaries are highly salient to the public. (As a consequence, the salaries tend to be low compared to analogous private sector positions: Imagine paying the managing partner of a major law firm the paltry 200k that the Attorney General of the United States draws).

The problems with the bargains struck by this political process for less visible salaries -- cops, teachers, sanitation workers, and the like -- is that the process is insufficiently visible to insure that the taxpaying public will stand by the bargain that is struck. Instead, bargains for pensions are negotiated that are not funded. The reasons for the disparity between the negotiated bargains and the public's willingness to pay for them when the bills come due are hardly mysterious: Future liabilities do not affect current tax bills, so the public pays little attention to the liabilities that their agents incur to buy labor peace. The public sector, of course, pays close attention (just as you or I would) to the details of their deferred compensation. Rational politicians and labor negotiators, therefore, cast labor costs forward on to future taxpayers in the form of generous deferred compensation, simply because this is the politically easy thing to do. In a comment on one of my earlier posts, Joseph Slater observed that arbitrators in a plurality of states must consider factors like "the amount of pay it takes to get and retain competent employees." These substantive criteria, however, will place no real constraint on pay just so long as taxpayers are inattentive and public sector unions are closely attentive.

The goal, therefore, should be neither to lower or raise public sector pay. The goal, instead, should be to create a more transparent process of negotiation to insure that public sector's deferred compensation matches real voter demand for the public sector's services at the moment that the bargain is concluded. Why not use the procedures for approving bonded indebtedness as a model? Since the 19th century, state constitutions have required referenda to approve bond issues over a certain level (usually measured against percentages of the jurisdiction's property tax valuation) as a way to avoid the sort of inter-temporal externalities that elected leaders are prone to impose. True, there are ways to evade these limits, but these evasion techniques usually involve identifying some revenue stream from which the bonds will be re-paid, thereby limiting the exposure of the government.

Why not likewise hold referenda on collective bargaining agreements in which the public is supplied with a fiscal note explaining the magnitude of the future pension liability being incurred? I do not pretend that such a procedure is a magic bullet and am happy to entertain alternative procedures. The important point, however, is that the public sector's deferred compensation ought to be the subject of a transparent, salient, and robust public debate in which the public sector unions are enlisted to pitch their services and requested compensation to the taxpayers when the compensation package is being negotiated. One advantage of such an open process would be that the public sector would have more of an incentive to play an "outside game" of persuading the taxpayers that higher pay will produce more professionalism and better services rather than an "inside game" of focusing on legalistic collective bargaining arcana about "steps," "lanes," "parity," and the like. After all, unless the public sector can "sell" the voters on the idea that their deferred compensation package is really necessary to get high-quality services, it really will not matter how solid their legal case might be for enforcing the pension bargain: Elected state judges are likely to bend to the current mood and allow re-negotiation.

So why not make the pitch to the voters up front, publicizing the details of the deal while it is being negotiated to assure passage in a referendum vote? A benefit of this transparency is that it would enlist the public sector to devote more energy to explaining to the public how higher compensation can buy better services -- a critical function in an anti-statist nation where public services tend to be under-valued. Such a highly publication ratification of a deal would also induce judges to take more seriously the idea that the taxpayers must stick by their bargain.

In short, all of the energy being devoted now to excoriating the public sector's past deals would be better spent on figuring out how taxpayers and service providers can bargain more transparently in the future. Public sector unions are no more greedy or corrupt than the rest of us: They will take what they are offered, just like you and me. The difference is that the negotiating process will put the public sector on both sides of the table so far as deferred compensation is concerned, because elected officials will tend to discount excessively the burden of future liabilities. Rather than scream at unions or try to wriggle out of old, bad, but arguably binding bargains, it is time for intelligent conservatives to think about procedures that can reduce that excessive discount.

Posted by Rick Hills on January 10, 2011 at 09:51 AM | Permalink

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"I do not worry whether I, as a NYU law prof, make too much money, because, if my current or prospective students do not want to pay what I make, then they can easily enough transfer to, or accept offers from, Columbia, Fordham, Brooklyn, or Cardozo. The competitive nature of the law school business absolves me of the need to justify my pay, given that students can vote with their feet."

I would categorize law schools as an oligopoly. There's the obvious point that there are barriers to entry (ABA accreditation). More important, (1) since most people are only willing to work in one (or a few) cities, and (2) nearly all law schools place only regionally, there really are not that many choices for most law students.

This doesn't mean you have to justify your salary (why would you?), merely that your proffered justification is lacking.

Posted by: GU | Jan 11, 2011 8:54:32 PM

Thank you for putting out a well thought and a fair appraisal of our situation in NJ. I am a retired public servant, or civil servant, or state worker. I invested 35 years of my life working for NJ and serving its citizens.

I and my fellow public employees/retirees are not the blame for this mess. We contributed what the state wanted us to contribute and the unions really have no say in state pensions per federal law. The state government makes the laws and regulations concerning our pension. I paid for those 35 years at 4 different rates. We received no pension holidays why others (state and local governments)did.

I will not belay you of horror stories during those years when we made due with wage increases that wasn't a third of what the cost of living was for that year, or the 20 years that our "Cadillac" health care benefits been slowly reduced to "Chevy".

I will advise the public that those active and retired neighbors of yours who are public employee/retirees total about 800,000 about 8% of our population but maybe generates as much as 20% of this state's buying power. We fuel much of NJ retail sales: cars, food, entertainment, etc. Without our financial support the small local merchants in this state will add to this state's ills.

Those 800,000 who live in NJ also fund a lot of tax dollars into Trenton. Do those who attack and want to whack our incomes and benefits realize that they will only hurt this state's fragile economy and result in larger tax bills?

Thank you

Posted by: Joseph A. Golowski | Jan 11, 2011 8:27:55 PM

Rick:

First, you would hold a public referenda on public sector pension rules set by *statute*? Any other statutes involving government payment for goods or services (or any other statute generally) on which you would hold public referenda? How would that work, exactly? People would vote on pension rules and formulas? Up or down?

Second, there are a number of studies comparing compensation of public and private workers, not all using the same methodology. I'll have a symposium piece out in the Indiana Law Journal in the (I hope) not-too-distant future citing a number of them, and you can see what they do. One can, of course, critique the methodology of pretty much any study on anything -- there's also an issue that some public sector jobs, e.g. policing, don't really exist in the private sector.

But there's a bit of a burden of proof issue here. A number of prominent Republican officials and conservative columnists have been flatly insisting that public employees are overpaid relative to the private sector. Study after study rejects that conclusion, and none seem to really support it. Some, as you suggest, find that in some cases, folks at the very bottom of pay scales get modestly more in the public sector. But not even all of them find that. The people making the claims need to do better than, "well, studies that show the opposite of what I'm insisting are true must be flawed in some way."

A more sophisticated conservative critique might be to suggest there is some monetary equivalent of the just-cause discharge rules that cover most public employees (through civil service laws or union contracts). But even that would be undercut by the massive layoffs in public employment in the past year.

Finally, I stress that I in no way am trying to suggest that the funding of pensions is not a real problem.

Posted by: Joseph Slater | Jan 11, 2011 6:03:02 PM

At last, a "conservative" that can make a cogent argument related to public pension plans. Not that I agree with everything you said, but I do agree that in many states improvements need to be made to their systems. Some states have managed to avoid many of these pitfalls by properly structuring their plans. Let's start by looking at what has worked, implement changes where necessary, but not throw out the baby with the bathwater, which seems to be intent of most conservatives. Hopefully, other "conservatives" will follow your lead.

Posted by: Brad | Jan 11, 2011 1:57:59 PM

Folks:
These benefits are generally protected by the state constitutions, for these are exchange transactions.
Employees willingly give up salary in lieu of retirement benefits.
This is opposed to nonexchange transactions, like Social Security.
Here, the employee is mandated to pay in, yet the government is not mandated to pay out.
In the exchange transaction, the state is legally and ethically obligated to fund the pensions adequately.
In the non exchange transaction, thete is no legal obligation to pay anything, beyond the current year's benefits.
Politically, it would make sense to take these obligations seriously, for the American citizens certainly do!
I can provide governmental excerpts and links for all those who are interested to support my statements.
Don Levit

Posted by: Don Levit | Jan 11, 2011 1:14:12 PM

Joseph Slater writes:

in a significant number of public sector jurisdictions, pensions are not legal subjects of bargaining for public employee unions. Pensions are set by statute and sometimes regulation, not by bargaining.

The critical question, I think, is not whether a benefit is the subject of collective bargaining but rather whether the benefit, once extended either by statute or negotiation, is plausibly protected under the relevant state's constitution as a right of contract. Where a benefit is so protected, I would recommend an unusually visible public process to insure adequate scrutiny at the front-end of the commitment, in the same way that bond issues are scrutinized. The policy problem is that the political process will enter into commitments that the voters are not prepared to keep: This problem can arise regardless of how the benefit was created.

Note also that, even if a benefit would not be protected by a court as a vested right, it might reasonably be regarded by public employees as morally equivalent to a contractual obligation. Unlike pension benefits, for instance, health benefits in New York are not protected by the state constitution as vested contractual rights. nevertheless, most public employees would probably regard such benefits as elements of their employment contract. As E.J. McMahon notes , this is a very large semi-contractual liability for which I'd recommend careful front-end review.

Joseph Slater also writes:

I would also note that a number of studies have shown that, despite much rhetoric from certain conservative voices, public employees do not make more than comparable private sector employees, even including defined-benefit plans and other forms of benefits.

Correct me if I am mistaken, but is it not the case that all such studies use educational criteria to determine which public employees are comparable to which private employees? (The studies with which I am familiar such as the Bender-Heywood study rely heavily on educational attainment to determine comparable private-sector jobs). If so, then such studies might be unreliable, because public employees have too much education, because collective bargaining agreements and civil service regulations may encourage educational attainments without relationship to their contribution to real productivity. School teachers, for instance are routinely promoted for masters and doctorates that might add little to classroom effectiveness. (Imagine if law firms gave you a big salary boost if you got a master's in legal history but not is you routinely won cases).

I do not mean to say that "the public sector" is over-compensated, because this generalization is manifestly untrue: As Tocqueville observed (in Book I, chapter 13), American state and local governments under-pay at the high end and over-pay at the low end. My guess is that this remains the case: Presidents, judges, attorneys general, and assistant U.S. Attorneys still make far less than their public-sector counterparts in Europe or their private-sector counterparts in America, but public-sector clerks and other low-level ministerial employees probably make more than equivalent private sector white-collar workers. (The notion that the average private security guard makes what a NYC or NJ cop makes boggles my mind).

But, as I say, this public-private comparison is not terribly meaningful until we agree on a normative theory about how compensation ought to be fixed.

Posted by: Rick Hills | Jan 10, 2011 6:35:06 PM

The operational requirements for maintaining defined benefit plans are not that complicated:

1) regular funding vis-a-vis the promised benefits
2) reasonable investing practices
3) honest accounting and actuarial work

Apparently neither corporate American or many political subdivision have felt the need to comply with these simple practices (not that long ago General Motors claimed its plans were over funded).

So if New Jersey hasn't bothered to fund its plans for a decade little wonder it is a mess. As far as future funding, it would appear the taxpayers already paid taxes for this once, and in the future will be asked to pay taxes for the benefits again, and that is the source of much taxpayer anger.

Any political subdivision with unfunded defined benefit plans deserves the bankruptcy headed its way (and the union leaders deserve a flogging).

Posted by: save_the_rustbelt | Jan 10, 2011 6:30:13 PM

Rick:

This is a very good post. Just a couple of caveats. First, as to what you quoted/linked me for, binding arbitration systems always (as far as I've seen) require the arbitrator to consider a number of other things beyond "comparables," most notable here the employer's budget/ability to pay. Some states are amending or are considering amending their statutes to make that the most important factor.

Second, as to the costs of pensions -- which are certainly a real issue -- it's important to understand that in a significant number of public sector jurisdictions, pensions are not legal subjects of bargaining for public employee unions. Pensions are set by statute and sometimes regulation, not by bargaining. This isn't true everywhere: in some jurisdictions, some unions can negotiate about at least some aspects of pensions. But it's true often enough that one shouldn't easily assume that changes in collective bargaining rules will change pension rules or even the process by which pension rules are set.

Finally, and I hope not too much in an adversarial spirit, I would also note that a number of studies have shown that, despite much rhetoric from certain conservative voices, public employees do not make more than comparable private sector employees, even including defined-benefit plans and other forms of benefits. Yet the Wall Street Journal identifies public employees as "America's most privileged class." This (and similar) rhetoric, I think, is not just about the real problems in public budgets; it's also about attacking the remaining bastion of union strength, for partisan advantage. Intelligent folks on all sides should be able to distinguish between real problems -- and possible real solutions -- and simple ideology or partisanship. While -- perhaps not shockingly -- I'm not leaping to endorse your proposal, I will say it is a good example of a reasonable discussion.

Posted by: Joseph Slater | Jan 10, 2011 1:40:54 PM

Rule #1 is bogus. Whether public-sector employees are overpaid or everyone else underpaid is irrelevant. The fact is that public-sector sinecures represent an unjust transfer of wealth from the latter to the former, especially since the criteria for private-sector employment include things like intelligence and creativity instead of mere high tolerance for boredom and inflicting pain on others, and especially since we are forced to deal with the drones but not the private-sector employees.

Rule #3 is bogus as well. I cannot truly vote with my feet. I can't study with government loans and pass the TX law bar in Brazil or register my Texas car in Brazil and I can't use any of my blood & sweat earned Medicare there either.

Since Obamacare is unavailable outside the USSA though the penalties will still be enforced, if it is not repealed, we can kiss goodbye to "voting with our feet" on all healthcare, unless you understand "voting with your feet" to mean abandoning your hard-earned wealth and even some of your current income to the government thieves.

Posted by: Jimbino | Jan 10, 2011 12:19:18 PM

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