April 29, 2013

Bankrupt Patriot Coal asks court to slash union pensions

April 29, 2013

Patriot Coal Corp on Monday will seek court permission to slash healthcare and pension benefits for about 13,000 union workers, an issue that has set off weeks of street protests by affected workers.

The company, which declared bankruptcy last year, said it wants to save $150 million a year on its labor obligations to help it regain profitability.

But the United Mine Workers of America, the nation's biggest coal miners' union, says the cuts are unfair and plans to protest outside U.S. Bankruptcy Court in St. Louis when the hearing starts on Monday.

Under bankruptcy law, if companies cannot negotiate compromises with unions, they can seek court permission to impose cuts unilaterally. And because employees' claims are subordinate to secured debt like loans and bonds, worker benefits are often the first place bankrupt companies look for cost savings.

This is especially pertinent in the coal industry, where benefits for generations of retirees are shouldered by an ever-shrinking workforce.

At the hearing starting Monday before Judge Kathy Surratt-States, Patriot must show that the cuts are crucial to its survival and that a good-faith effort was made to achieve them cooperatively.

Patriot will call witnesses, and then the union will begin its rebuttal with its own set of witnesses, in a process that could go all week.

Patriot has said the cuts are not a matter of stinginess, saying that current benefit obligations could send the company into liquidation.

Under its latest offer, Patriot would cease pension contributions and replace current health benefits with a voluntary employees' beneficiary association. The VEBA would be funded by $15 million in up-front cash, plus $300 million in profit-sharing contributions and recoveries from litigation. The union would also receive a 35 percent equity stake in post-bankruptcy Patriot, which it could sell to help fund the VEBA.

Lawyers for the union have acknowledged Patriot's financial woes, which were brought on by high labor costs combined with weak coal prices caused in part by a glut of natural gas.

But they say that Patriot's bankruptcy is even harder on workers and retirees than most, alleging that former parent Peabody Energy Corp set Patriot up to fail when it spun it off in 2007.

Peabody, which retained profitable coal mines throughout the United States and Australia after the spinoff, loaded Patriot up with pension and benefit liabilities for retirees, many of whom retired before the spinoff and never worked for Patriot.

The union has filed a separate lawsuit in federal court in West Virginia, where many of Patriot's operations are centered, seeking to hold Peabody liable for the benefits workers might lose through Patriot's insolvency.

Led by Cecil Roberts, the union has staged protests in New York, Appalachia and St. Louis since Patriot declared bankruptcy in July.

Patriot also has several thousand non-union employees, with whom it reached new, consensual labor terms last week.

The bankruptcy is In Re Patriot Coal Corp, U.S. Bankruptcy Court, Eastern District of Missouri, No. 12-51502.

Bureaucrats Can Retire at 55 With a 3-Tiered Retirement Plan While Those Paying for Their Salaries, Benefits and Pensions May Have to Wait Until Age 70 to Receive Social Security Benefits and Medicare

Since 1987, federal employees including members of Congress have had the benefit of three guaranteed income payments in their retirement [for many federal retirees, their income is virtually unchanged — their retirement income is almost as much as their income while still employed by the federal government; and because they can retire so young, many of them start a second government career, double dipping into the public treasury].
  1. First, like nearly all other workers, they receive Social Security.

  2. Second, like many workers, they have a 401k-style plan with an employer match (known as the Thrift Savings Plan or TSP).

  3. And third, like most public sector workers, they also receive a traditional pension through a system known as FERS (the federal employment retirement system).
Federal employees under the Federal Employees Retirement System (FERS) or the Civil Service Retirement System (CSRS) can take regular optional retirement if they are 55 with at least 30 years of service; age 60 with 20 years of service; or age 62 with 5 years. If the agency offers early retirement, they must be at least 50 with 20 years of service or have 25 years of service at any age. An employee under FERS also is eligible for an immediate annuity if he/she has 10 years of service and has reached the minimum retirement age (55 if born before 1948, and gradually increasing to 57). An employee under CSRS must meet the 1-out-of-last-2 year's coverage requirement and all employees must have at least 5 years of civilian service. [Source]

Currently, U.S. citizens cannot collect Social Security benefits until age 62 (lawmakers are considering raising this age to 67 or 70). The maximum Social Security benefit at age 62 is $21,636 per individual. [Source]

The Pension Benefit Guaranty Corporation (PBGC) is an independent agency of the United States government to guarantee payment of basic pension benefits earned by more than 44 million American workers participating in more than 27,000 private-sector defined benefit pension plans. If a company ends its pensions and hands the obligation for future payments to the PBGC, the agency limits how much it will pay, with the current top benefit now $54,000 a year for people who retire at 65; less for those who retire earlier. [Source]

The captains of “private” industry pump their bottom line for years with their worker’s pension contributions (much like the federal government has done with Social Security receivables). When it comes time to pay the pensions they dump the obligation onto the taxpayer through the Pension Benefit Guarantee Corporation which was reported to be $12.9 in the red for 2009. Once again, the taxpayers are funding their own servitude while the ownership class pillages on the way up and on the way down. [Source]

U.S. Insurer of Pensions Sees Flood of Red Ink

The New York Times
May 20, 2009

The deficit at the federal agency that guarantees pensions for 44 million Americans tripled in the last six months to a record high, reaching $33.5 billion, largely as a result of surging bankruptcies among companies whose pensions it expects it will soon need to take over.

The agency, the Pension Benefit Guaranty Corporation, faced a shortfall of just $11 billion as of October. The combined effect of lower interest rates, losses on its investment portfolio and rising numbers of companies filing for bankruptcy produced the jump in its projected deficit, officials said Wednesday.

Because the agency has $56 billion in assets — most of which is invested in Treasury bonds — it is not facing any prospect of default in the short term, officials said.
“The P.B.G.C. has sufficient funds to meet its benefit obligations for many years because benefits are paid monthly over the lifetimes of beneficiaries, not as lump sums,” the agency’s acting director, Vince Snowbarger, testified Wednesday at a Senate hearing. “Nevertheless, over the long term, the deficit must be addressed.”
The financial troubles are just a small part of the challenges facing the pension agency, which was created by Congress in 1974 and today is responsible for pension programs covering 1.3 million people. It pays about 640,000 people actual benefits worth about $4.3 billion a year.

The P.B.G.C.’s former director, Charles E. F. Millard, was subpoenaed to testify at the hearing Wednesday. But he cited his constitutional right to avoid self-incrimination and declined to answer any questions.
Mr. Millard, who resigned in January, has been accused by the agency’s inspector general of having inappropriate contact with companies including BlackRock, JPMorgan Chase and Goldman Sachs, all of which competed for and won contracts to help manage $2.5 billion of the agency’s funds. Those contracts will now most likely be canceled.
Employers nationwide with so-called defined-benefit, or traditional, pension plans pay fees to the P.B.G.C. in return for a promise that it will take over their pension plan if a company fails.

On Tuesday, for example, the agency announced that it had assumed the pension plan once run by the Lenox Group, a bankrupt maker of tableware, giftware and collectibles based in Eden Prairie, Minn. Assuming control of pensions for this company’s 4,300 workers will cost the agency an estimated $128 million — the difference between what Lenox had in its pension fund and what the total estimated obligations are.

In the last six months, 93 companies whose pension plans are covered by the agency have filed for bankruptcy, including Chrysler, whose failure alone could cost the agency $2 billion. A bankruptcy by General Motors would make the situation worse. G.M. had 670,000 workers as of late last year in its pension system, whose collapse would cost the agency an estimated $6 billion.

Options to close the $33.5 billion deficit include a federal bailout by taxpayers, a change in insurance premiums it charges employers, or increasing its investment returns.

Last year, the agency’s board voted to allow it to shift its investment strategy to put more money into stocks, private equity and real estate, in an effort to reduce the deficit. If that shift had taken place, the losses would most likely have been larger. But only a relatively small amount of the funds have already been shifted to stocks, so the losses on the investment portfolio were responsible for just $3 billion of the jump in the deficit in the last six months.

Senator Herb Kohl, Democrat of Wisconsin and chairman of the Senate Special Committee on Aging, which held the hearing Wednesday, blamed poor supervision by the agency’s board and management, at least in part, for the troubles, adding that he intended to introduce legislation that would expand the board and require it to meet at least four times a year. The board has not met in person since February 2008.
“The role of P.B.G.C. is too crucial to allow its governance to slip through the cracks,” Mr. Kohl said.

50,000 General Motors Retirees Face Destruction of Benefits

World Socialist Web Site
July 17, 2009

Earlier this week the WSWS spoke to a General Motors IUE retiree who responded to our article on the bankruptcy court’s approval of the sales of GM assets.

Tom Micale is a retiree from the Delphi Battery plant (formerly Delco Battery) in New Brunswick, New Jersey, IUE Local 416.

WSWS: Tom, how long did you work at General Motors?

Tom Micale: I started working for GM when I was 19 years old. I retired in 1999 when I was 49. I worked for the Delphi division of General Motors, in New Brunswick. I retired shortly before General Motors got rid of Delphi.

We had a choice to retire under GM, or to continue with Delphi. I thought I was making the best decision by going with General Motors. They implied that when we retired we would have lifetime pension and lifetime health benefits, even though when I retired that wasn’t my goal.

A couple of years after I retired, I worked at a battery division at Delphi. Delphi got rid of the division. Within a year, Johnson Controls, which bought the battery operations in 2006, dumped the two battery plants that it had operated. The New Brunswick plant closed in 2007.

Delphi declared bankruptcy in October 2005, as you know.

So I thought that I had made the right decision go with GM. Then things began to happen to the economy, and later General Motors declared bankruptcy, that’s when this whole thing started.

When I saw what had happened with the UAW and their VEBA, I thought perhaps we would be all right. However, I started really researching the GM bankruptcy proceedings, and it came to my attention that things were not as they appeared to be.

WSWS: Now, you are one of the tens of thousands of IUE and other non-UAW retirees facing the immediate elimination of your benefits. What is happening at this point, as far as you know?

TM: We have not received any official notification, but I have read the bankruptcy court judge’s decision, and as of right now my medical benefits are with the “Motors Liquidation Company” of GM [“the bad company”].

I can’t verify it, but I have read that the “old GM” intends to file a request to the judge within a few days concerning the benefits to retirees, because it cuts too much into the monies they have. And I fully expect by the end of the month that that will occur, and that we will, in fact, have lost all of our benefits.

As far as my pension is concerned, I am on what they call a Supplemental Pension, which is a base pension. GM makes up the difference between the base pension and what I will get when I qualify for full Social Security. Although under the contract, I will be required to file for Social Security when I am 62 at reduced benefits, so it will be somewhat less than what I get on my supplemental.

I cannot find out—and I have researched it! ... I cannot find out whether or not the pension has gone with the new GM, or is staying with the old GM. If the benefits stay with the old GM, it is most likely they will turn the pension over to the government’s Pension Benefit Guaranty Corporation, and they do not pay supplemental pensions. So I would take a hit on my pension by about 60 percent, from $2,400 to a little over $900.

WSWS: To be cut that much is drastic.

TM: If I sound like I am crying the blues or something, stop me. I don’t want people to feel sorry for me. I feel fortunate compared to some of the other retirees. My wife and I lead very simple lives. We don’t spend a lot. I live in South Carolina. I paid for my house. I don’t owe money to the bank.

We don’t qualify for Medicare for five years. But whatever savings I have is sucked out by the medical industry in this country. My wife has rheumatoid arthritis and asthma. She was young, 40 years old, when she was diagnosed with it. That was twenty years ago. She has been on every kind of medication there is. The latest one is often given to cancer patients and people who have transplants.

She started it two weeks ago, and it costs $1,600 a month. Not including her other medicines. With the medicine I take—I have heart disease—our costs for medication alone are $2,400 a month. And that doesn’t include doctor’s bills.

If I deplete my savings, and I would say that will happen within the next five years, only then will I qualify for Medicare or any form of charity care. If the benefits from GM are cut, we will eventually have to apply for charity!

I have to tell you, this is a shock, an absolute shock to me. I never expected this.

I also care for my mother who has Alzheimer’s disease. She was in a nursing home, but I couldn’t leave her there. I’ve cared for her for three years, and also my wife’s two brothers for the last six years. They’re legally blind and totally deaf. They each get a small Social Security payment, which helps defray some of their costs, but the time is totally spent at home doing this.

WSWS: Could you tell me more about the decision of GM to file under Section 363 of the Bankruptcy Code and not Section 1114, which provides more protection?

TM: In my opinion it was all worked out beforehand by the government. It is unprecedented for a company the size of General Motors to go through bankruptcy in 40 days. It should have taken years.

At Delphi, which was one of their suppliers and a much smaller company, it has been four years and they are still working through bankruptcy. It’s just unprecedented, and I believe the whole thing was orchestrated before it ever got to a judge. Not only do I feel GM orchestrated this, I believe the government of this country orchestrated this. We are collateral damage.

WSWS: What do you think of the role of the UAW? It hasn’t said anything in defense of the IUE retirees.

TM: I think its great for the UAW to negotiate a VEBA and have a little bumper on their bumpers. From 1986-89 I was the shop chairman of the IUE, or shop steward, so I was involved in the union at that time as an officer. I can see it from the other side. What I see, however, is the total lack of support between the UAW and the other smaller unions. The unions have morphed into something that is no longer for the workingman, but merely better than nothing.

WSWS: This agreement was not negotiated for the benefit of the UAW workers, but for the benefit of the UAW officials. The last contract will bring new hires in at half the wages.

TM: I have to be honest here. I did the same thing to my local. I bowed to the pressure from my own plant, from those about to retire and from the IUE, and I was the one who negotiated our first ... what we called “competitive agreement.” It was a two-tier agreement, which brought people in at half our wages. It was the biggest and greatest mistake I have made in my life, and I have made many!

I regret it to this day. But the unions have gotten away from the principle of solidarity. Like I say, I was only in office three years, but during that time I got to see how the unions really operated. I was not disappointed that I lost the election, and I lost the election because of the two-tier wage system.

People brought in at lower wages were convinced that the man who ran against me would get their wages back, which would never happen. This was a real eye-opener for me. I had expected better until I saw how a union operated on the national level.

WSWS: Barack Obama came in saying he was going to save jobs.

TM: I supported Obama. In the last 30 years, there have only been two presidents I’ve voted for. I believed Obama. I am gravely disappointed since he took office; he is barely doing anything he said he was going to do. When he does, it is more heavily weighted, like the Republicans, for the wealthy in this country. The rest of us are just incidental, despite what he says.

We have a Congress that is majority Democrat, but again it shows that the Democratic Party does not have the courage to do anything. For example, they are supposedly working on this health plan, which I wholeheartedly support. But I don’t expect that anything will come from this Congress that’s going to help me or most Americans. It’s going to be a token.

I don’t have any confidence in them. I’ve lost my entire faith in this so-called representative government. It’s a shame. After 59 years of living in this country and following the rules, I’m just losing faith in the way things are done.

The health care plan will be a boondoggle for the health care providers. The elite in this country do not want a national health care system. As long as we pay taxes and buy their products, that for them is the bottom line.

The auto industry was doing poorly because the entire economy was doing poorly. When people tell me the autoworkers made too much money, they don’t understand we paid for those benefits by the hard work we did. I made a good living, but we paid for this with our sacrificing.

WSWS: They are trying to condition people to accept lower living standards. Those gains were the result of a long history of struggle. It was socialist-minded workers in the 1930s who led the struggles to form industrial unions.

TM: There is still on the local level a belief in the principles of the unions, but at the International level it is something entirely different. I saw it first-hand. Featherbedding, and “let’s not make waves” ... I hate it. It’s at the expense of the common, working man. That is why I am still trying to contact retirees, and so on. I want to bring some attention to the plight of the retirees.

I am not looking for the unions to support me in that. It’s something the people have to do themselves. If no one else will do it, I’ll be alone, walking on a picket line. But people in this country have do something and begin to take their country back.

There was a belief that this country had numerous classes, from the extremely poor to the middle class, right on up. There are two classes in this country now, the rich elite and everyone else. This past decade, it has hit us right in the face. In the past, the elite didn’t want us to know that. But now, they don’t even care, because they don’t think we’ll do anything and will be complacent.

The system is broken. I think at some point in time, this country will have a third party. My views have always been on the far left, which cross into socialism in many respects. That’s the way I feel. I honestly am for the working people. I think it is unacceptable that the poorest of the poor don’t have a meal.

After Declaring Bankruptcy So That It Could Cut Wages, Pensions and Benefits, GM Posts Its Highest Profit Ever: $7.6 Billion

The Associated Press
February 19, 2012

Just two years after it was rescued and reconstituted through bankruptcy and a government bailout, General Motors Co. cruised through 2011 to post the biggest profit in its history. 

GM, which released its earnings Thursday, performed best in its home territory, posting a $7.2 billion pretax profit in North America. The numbers were so good that 47,500 blue-collar workers will get $7,000 profit-sharing checks, the maximum allowable under their new union contract. International Operations, which includes Asia, made $1.9 billion before taxes, but that was down from 2010. 

Why a Millionaire Wants Autoworkers to Take a Pay Cut

Yahoo! Autos
December 16, 2011

The former head of the Obama administration's auto task force says he should have pushed the United Auto Workers for steeper sacrifices in the General Motors bailout, including wage cuts. The people earning $9 a hour in a suburban Detroit GM plant would disagree.

Former auto czar and wealthy Wall Street financier Steven Rattner told a luncheon in Detroit on Thursday:
That while the $50 billion GM bailout was successful, "we should have asked the UAW to do a bit more. We did not ask any UAW member to take a cut in their pay."
He also said that "friends on Wall Street" were concerned by GM's earnings and communications with the market, pushing the stock down to a level that would lose the government $14 billion if it sold its shares today.
Meanwhile, at General Motors' Orion Township, Mich., plant about 45 minutes away from where Rattner spoke, there are three tiers of hourly workers.
  1. Roughly 900 workers at the top tier, the most senior UAW workers, make $29 an hour, a rate unchanged since 2008.
  2. Another 500 or so UAW workers are paid about $16 an hour — a rate, adjusted for inflation, equal to the famed $5 a day Henry Ford started paying his workers in 1914.
  3. And at the bottom scale are 200-odd workers technically employed by an outside supplier but who work in the plant moving parts to the assembly line, jobs once done by GM workers paid $29 an hour. The contractors' pay: $9 an hour with no health care, a rate which over a year's work would leave them below the poverty level for a family of four.
GM's contract with the UAW that convinced the company to move small-car production to Orion from South Korea allows it to shift such work to the outside supplier. That supplier has resisted UAW bargaining, and the tensions have grown high enough that UAW workers at the plant picketed earlier this month and sought approval from the union for a strike. (They delayed one planned picket so that President Obama could tour the plant with South Korea's president).
GM's North American arm posted operating profits of $5.7 billion in the past nine months, on which it will pay little to no federal income tax thanks to a law passed during the bailout preserving tax credits from the years when it bled money. The estimated savings to GM of its tiered wages at Orion: $112 per vehicle, on Chevy Sonics and Buick Veranos that start at $14,500, and can sell for $29,000. By GM's own stats, $29,000 is also the average annual wage of all GM hourly and salaried workers at Orion.

The UAW wants to move tier two workers up in the coming years, while all three Detroit automakers expect to expand the number of workers being paid the lower wage. Rattner's friends on Wall Street may want GM to cut deeper and answer their whims, but I don't see many of them embracing a life of poverty just to keep their jobs -- despite their far larger bailout.

Why America Faces a Big Fat Greek Bankruptcy

Public sector employee unions have no legitimate public purpose, but are instead in league with bureaucrats against the taxpayer.

By AmericanElection.com
May 6, 2010

Why We’re All Greeks Now.

Forget Global Warming -- Catastrophic Government Spending Is the True Threat to Our Survival.

Have you read the news lately? Greece is bankrupt. The entire country was poised to default on its debt, when the European Union (led by Germany) and the IMF (led by the USA) decided to bail them out…or risk the collapse of the entire EU and their currency, the euro. As always happens any time government is involved, the dollar figure necessary to save Greece keeps rising…first it was $50 billion…then $100 billion…now $145 billion, the biggest loan to a country ever.

But here’s the clincher -- this gigantic loan will last only one year. The IMF (International Monetary Fund) assumes in one year, when Greece needs more money to stem the flow of red ink, they’ll be financially stable enough to attract loans on the open market, with no more government help. But what if the IMF is wrong? Then we’ll see one big fat Greek meltdown -- taking all $145 billion down the tubes (much of it from U.S. taxpayers). That’s assuming that Greece is telling the truth about their debt in the first place. But just like the U.S. government, Greece has lied to themselves and their citizens for years. And just like AIG, GM, Fannie Mae, Freddie Mac, and the failing public school system in America, the money we give Greece will never be enough. It’s a bottomless pit.

But Greece is the EU’s smallest problem. The other PIGS (Portugal, Italy, Ireland and Spain) are in far deeper trouble than Greece. Unfortunately the EU and IMF just used up most (if not all) of their bullets on Greece. There isn’t enough money in the world to bail out the rest of Europe. We are staring at economic Armageddon.

So what caused this? Very simply, big government and government employee unions. Greece’s problem is Europe’s problem…and following closely behind, America’s problem too. We’re all Greeks now. Quite simply, Greece’s problem starts and ends with government employee unions.
  • There are too many government employees (1 in 3 Greek citizens works for government);

  • Their salaries are way too high;

  • Their bonuses can only be described as insane (2 months for each public employee);

  • Their pensions are ridiculous (retirement far too young and free healthcare for life); and

  • Their government jobs are guaranteed for life.
Sounds crazy, right? Sounds like in Greece the inmates must be running the asylum. Except America has the exact same problem. California, New York, New Jersey and Illinois are our very own homegrown version of Greece. These states are bankrupt, insolvent, and desperately need a bailout. Why? For the same reasons as Greece. Far too many government employees; bloated salaries for civil servants; bonuses and raises are contractually obligated even during an economic crisis; sky high pensions; and jobs guaranteed for life. The only difference is that we are a nation of 300 million, so the debt is far bigger than Greece. It turns out that we are Greece squared.

The solution to save America from economic Armageddon? Simple. Use the same “austerity measures” imposed upon Greece, in return for this $145 billion loan, to dramatically cut spending on government employees:
  • Freeze government hiring for the next 3 years.

  • Eliminate bonuses and raises for the foreseeable future.

  • Institute layoffs and across the board wage cuts. Why should government employees enjoy “privileged status” that no employee in the private sector enjoys?

  • Change pensions from ‘defined benefit’ to ‘defined contribution’ pension plans, meaning retirees receive only what has been built up in their 401K-type retirement accounts.

  • Raise the retirement age. In Greece it is going from age 53 to 67. Gold-plated pension plans are the single biggest factor that bankrupted Greece. The same problem bankrupted U.S. automakers GM and Chrysler.

  • Require government employees to pay more of their healthcare (through co-pays and deductibles).

  • Change the way pensions are calculated by eliminating overtime and raises in the last years of employment to “game the system.”
The real global threat to our existence isn’t global warming -- it’s catastrophic government spending and, more specifically, spending on government employees. Our government’s unfunded liabilities are now estimated at $60 to $75 trillion over the coming decades.
To give you some perspective, the New York Post recently reported that one New York firefighter is retiring on a pension of $240,000 per year. If he lives 40 years beyond retirement, that will cost the taxpayers almost $10,000,000. That’s for one single government employee.
There are millions upon millions of them on the federal, state and local level. Can you say “fiscal disaster?”

Government employees should be cheering these solutions. The plan above might actually save their jobs and pensions. But keeping the status quo of unsustainable spending will sink this country -- in which case government employees will lose their jobs and pensions. Anything that saves our economy, will be healthier for them (as well as the rest of us) in the long run.

It turns out that the Greek model is the American model. It turns out that we need saving too. We're all Greeks now. We either stop the insanity or we wind up with our own big fat Greek bankruptcy.

Private Union Pensions Are the Next Bailout

August 18, 2010

The addition of a powerful Senate ally may be what supporters of a new union bailout bill need to get legislation passed that would put the responsibility for funding union pension plans on the shoulders of American taxpayers.

That new ally is Senate Majority Whip Dick Durbin (D-Ill.), the Senate’s number two Democrat and longtime union ally. The bill, the Create Job and Save Benefits Act of 2010, is the plan of Sen. Bob Casey (D-Pa.) and had languished in committee since March 23.

With the addition of Durbin – who lent his support shortly before the Senate went on summer break – the bill could see new life, especially since Senate Democrats failed to pass the Employee Free Choice Act, known as Card Check, a top priority of their union allies.

The bill would allow the federally chartered Pension Benefit Guarantee Corporation (PBGC) to use taxpayer money to bailout so-called “orphan” benefits plans.

Currently, the PBGC acts as an insurance fund for retirement pensions, charging a fee to extend coverage to private pension plans, should those plans fail. In the event that a pension fund cannot pay the benefits it promised, the PBGC can step in and use the fees it collects to pay benefits. The PBGC is not allowed to tap into taxpayers’ money to bail out pension plans.

The problem for many union pension plans is that they are structured as multi-employer plans, which means that employers in certain unionized industries contribute to the plan. While employers are required to fund the plans, they do not control how that money is invested, a responsibility that falls to the unions.

In the wake of the 2008 financial crisis and recession, many of these plans have gone into distress, facing both funding and liquidity issues as the value of the plans’ assets have declined and some of the businesses funding them have closed.

This poses a problem because if a company goes out of business, it can no longer fund the pensions of its former employees, even though those workers can still draw from the pension fund. This places increased financial strain on the remaining companies and puts pressure on the unions to cut benefits.

A 2009 report from Moody’s Investment Services found what other economists had previously warned about: that many union pension funds were already underfunded and would probably not be able to pay out all of the benefits they had promised to current and future retirees. This becomes a major problem for the unions because their plans are defined-benefit plans that promise to pay a certain level of benefit no matter what.

The underfunded state of many union plans -- 27 such plans far this year -- could prove disastrous for the unions, since the PBGC will only pay a maximum of $12,870 per year per retiree if it bails out a multi-employer pension.

When a multiemployer pension is unable to pay promised benefits it goes into critical status, a designation that allows the PBGC to take it over and begin paying benefits. The Casey bill would solve many of the union plans’ problems by shifting the burden from the unions to the taxpayers, shielding the unions from having to accept the reduced benefits that come when the pension plans go bankrupt.

Plans that are considered critical are those with only 65 percent of the assets needed to pay all current and future benefits. When a plan goes into critical status it must immediately cut its vested benefits.

Casey’s bill would set up a special “fifth fund” within the PBGC that would be used specifically to bail out multi-employer pension plans that fail and assume critical status. Once a plan goes into critical status, the Casey bill would empower the PBGC to step in and draw from the fifth fund to pay out benefits.

The PBGC would then guarantee the benefits of union pensioners.
“The monthly benefit of a participant or a beneficiary … which is guaranteed under this section by the corporation with respect to a plan is equal to the nonforfeitable benefits of such participant or beneficiary” before the plan went bankrupt, according to the legislation.
In recognition that many union plans -- confronting a combination of increasing liabilities and decreasing funding -- are likely to face serious financial difficulties in the future, the Casey bill allows the PBGC to use taxpayer money to fund the union pension bailout.
“[O]bligations of the corporation [PBGC] which are financed by the fund created by this subsection shall be obligations of the United States,” the bill states, meaning that the federal government -- “obligations of the United States” -- would ultimately be responsible for paying the pension benefits of union retirees.

The Union Pension Bailout

National Center for Policy Analysis
June 1, 2010

Feeling tapped out after stimulus, ObamaCare and everything else? Senator Bob Casey has one more deal for you. If the Pennsylvania Democrat gets his way, U.S. taxpayers will also pick up the astonishing tab for poorly managed union pension plans, says the Wall Street Journal.

Casey is gathering support for his "Create Jobs and Save Benefits Act," a bailout for union run retirement plans. Similar to House legislation from North Dakota Democrat Earl Pomeroy and Ohio Republican Patrick Tiberi, the bill would transfer tens of billions of dollars worth of retiree liabilities to the Pension Benefit Guaranty Corporation, i.e., to taxpayers.

At issue are multi-employer pension plans, in which companies across an industry pay into a single pension pool:
  • The plans are predominately run by unions and for years have distinguished themselves by poor management.

  • The Labor Department in 2008 listed 230 multi-employer plans that were either endangered (less than 80 percent funded), or critical (less than 65 percent funded), or that had applied to government for funding relief.

  • By 2009 that number had soared to 640.
The financial crash is partly to blame, but even before 2006 only about 6 percent of multi-employer plans were fully funded, compared to about 31 percent of single employer plans. The real problem is that multi-employer plans have become a sort of pension Ponzi scheme, says the Journal.

Unions love multi-employer plans because they let workers keep their retirement benefits even if they switch jobs to another participating company. This encourages lifelong union membership. Unions are less enthusiastic about paying the bills. The negotiating priority of union leaders is to get hefty wage increases and benefits for current workers, leaving the scraps to the pensions of retirees who no longer vote in union elections, says the Journal.

Source: The Union Pension Bailout: A scheme for taxpayers to cover mismanaged multi-employer plans, Wall Street Journal, June 1, 2010.

Update: The Next Pension Bailout , Wall Street Journal, August 15, 2010.

Obama Plans to Takeover 401K to Bail Out Union Pension Funds

For the first time, taxpayers may become responsible for the nongovernmental pension liabilities of union collective bargaining contracts in construction, trucking and other industries in which workers move from one employer to another. Some estimate that these multi-employer pensions are $165 billion short of committed obligations for paying retirees' defined benefits. It's not a new problem, but it has been under the radar for years as it's worsened. - Editorial: Private union pensions the next bailout?, The Orange County Register, August 20, 2010

Gateway Pundit
May 4, 2010

The Obama Administration is making plans to take over the nation’s 401(k)s in order to bail out their union backers and their bankrupted pension plans.
Connie Hair at Human Events reported:
In February, the White House released its “Annual Report on the Middle Class” containing new regulations favored by Big Labor including a bailout of critically underfunded union pension plans through “retirement security” options.

The radical solution most favored by Big Labor is the seizure of private 401(k) plans for government disbursement — which lets them off the hook for their collapsing retirement scheme. And, of course, the Obama administration is eager to accommodate their buddies.

Vice President Joe Biden floated the idea, called “Guaranteed Retirement Accounts” (GRAs), in the February “Middle Class” report.

In conjunction with the report’s release, the Obama administration jointly issued through the Departments of Labor and Treasury a “Request for Information” regarding the “annuitization” of 401(k) plans through “Lifetime Income Options” in the form of a notice to the public of proposed issuance of rules and regulations. (pdf)
Republican Leader John Boehner released this statement today in response to this recent move by democrats:
Keep Bureaucrats’ Hands off Americans’ 401(k)s

House Republican Leader John Boehner (R-OH) and members of the House GOP Savings Solutions Group sent a letter to Labor Secretary Hilda Solis and Treasury Secretary Timothy Geithner warning the Obama Administration that the government should keep its hands off of the retirement savings of Americans, and should reject proposals that would dismantle or nationalize the private 401(k) system in favor of a government-run retirement security regime. Several Administration officials, including the Vice President, have voiced support for efforts to create so-called “Guaranteed Retirement Accounts” or impose new government mandates which would undermine 401(k) retirement savings plans and jeopardize employers’ willingness to continue offering them to their workers. Boehner issued the following statement:

“The American people are asking ‘where are the jobs?’ They aren’t asking for job-killing policies that jeopardize their retirement savings. Unfortunately, Washington Democrats are pursuing policies that make it more difficult to offer 401(k) savings plans to their workers, and some are even advocating replacing them with government-run accounts and ending 401(k)s altogether. That’s unacceptable and not the solution Americans need at a time when they are still rebuilding their retirement, college, and personal savings.

“Republicans are committed to offering better solutions, and the proposal we have offered – the Savings Recovery Act – will help restore Americans’ savings and ensure that Washington does not stand in the way of families’ ability to save more. It’s time for Democrats to stop advocating policies that will destroy Americans’ savings and work with Republicans on better solutions to help rebuild them.”
Several GOP House members signed on to a letter delivered to labor Secretary Hilda L. Solis and Treasury Secretary Timothy Geithner expressing their concerns today.


April 26, 2013

The New Face of the Union Movement: Government Employees

By James Sherk, The Heritage Foundation
September 1, 2010

Abstract: Unions have been a familiar part of American working life for more than 70 years. Less familiar is the state of the union movement today: More union members now work for the government than for private employers. The above-market salaries and benefits that government employees receive are paid for by taxpayers. So, the union movement that began as a campaign to improve working conditions and salaries for workers in the private sector, now pushes for ever-higher taxes to increase the generous compensation that government employees enjoy. Heritage Foundation labor policy expert James Sherk details the changes in the union movement, and explains how Congress can react to this new reality.

The American union movement has reached a historic milestone—more union members currently work for the government than for private businesses. As a result, the union movement’s priorities have shifted. Because taxes fund government pay and benefits, unions are now pushing for tax increases across the country. The union movement that once campaigned to raise private-sector workers’ wages has transformed into a government union movement that campaigns to raise their taxes.

How did this happen? Union organizing surged after the passage of the National Labor Relations Act (NLRA) in 1935. But because union contracts raise costs, unionized businesses generally grow more slowly than non-union firms. Market competition has caused union membership to gradually fall in the private sector since the 1950s. The new government unions created in the 1960s could safely demand inflated pay without putting their jobs at risk. Now most union members work for the government.

The early trade unionists did not believe that unions had a place in government. They believed the purpose of unions was to redistribute profits from business owners to workers—and the government makes no profits. The government labor movement has become a powerful special interest lobby to raise taxes on working Americans to raise the level of compensation for government workers. Taxpayers should not have to subsidize this lobbying. Congress should prohibit federal unions from using the federal payroll system to automatically deduct union dues from government employees’ paychecks.

New Government Labor Movement
The American labor movement marked a historic shift in 2009. For the first time in U.S. history, more union members worked for the government than worked in the private sector. The U.S. Postal Service employs three times as many union members as the domestic auto industry.[1] Table 1 shows union membership in the United States in 2009 and through the first seven months of 2010.

Union Membership in the United States

Overall union membership dropped again in the first half of 2010: down by 603,000 members to 11.9 percent of all employees. Private-sector and public-sector unions both lost members. Private-sector unions lost 323,000 members, dropping to 7 percent of the private-sector workforce. A smaller proportion of private-sector workers belong to unions now than at any point since the Supreme Court upheld the National Labor Relations Act. Union membership also fell by 281,000 members in government, dropping by 1.7 percent of the government workforce.

However, well over one-third (35.7 percent) of government employees still belong to a union. The 7.6 million union members who work for the government make up 51.7 percent of all union members in the United States. The new face of the union movement is the clerk at the Department of Motor Vehicles, not the worker on the assembly line.

Private-Sector Strikes Rare. As the labor movement’s membership has moved toward government, so have its priorities. Labor unions once focused on improving private-sector working conditions, but now their efforts have shifted toward increasing government pay and benefits.

The frequency of private-sector strikes demonstrates the union movement’s changed priorities. Threatening strikes is the main tool that unions use to win concessions from private employers. Now strikes have become exceedingly rare.

Unions used to launch hundreds of strikes a year—often at considerable cost to the economy. In 2009, unions initiated only five major strikes that involved 1,000 workers or more. The recession does not explain why unions so rarely strike. In 2007, the last year before the recession, unions engaged in just 21 strikes.

New Labor Priority: Political Influence. The union movement’s priorities have shifted from the picket line to politics. Many government unions are prohibited from striking by law, so to raise government pay unions must influence the legislative processes that determine their wages.

The union movement has ample money at its disposal. In states without right-to-work laws, unionized employees must pay union dues or lose their jobs. State and local governments use their payroll systems to collect dues for the union. The government automatically deducts the dues— typically 1 percent to 2 percent of a government employee’s pay—and deposits it in the union’s bank account.

One percent of the pay of several hundred thousand government workers is a lot of money. The New Jersey Education Association has 179,000 active members who each have to pay union dues of $761 every year.[2] That works out to more than $136 million in dues a year. The American Federation of State and County Municipal Employees (AFSCME) national headquarters brought in $193 million in union dues in 2008. AFSCME’s local affiliates raised hundreds of millions more.[3]

The union movement spends much of this money on politics. In election year 2008, AFSCME spent $63 million on political campaigning and lobbying. That was 32 percent of its overall budget and well more than the $39 million it spent representing its members.[4] In 2009, the American Federation of Labor and Congress of Industrial Organizations (AFL–CIO) spent $29 million on representational activities and $47 million on political campaigning and lobbying.[5] The amount spent on politics represented 25 percent of the AFL–CIO’s budget.[6] The AFL–CIO and the Service Employees International Union (SEIU) just announced their intention to spend $100 million on electing sympathetic candidates in this year’s midterm elections.[7]
This political spending gives unions considerable political influence. Government unions use this influence to press Congress and state legislatures to raise government salaries and to hire more employees. They have largely succeeded. The average government employee earns more than his counterpart in the private sector.

Government Pays More. The average federal employee earns hourly cash wages 22 percent above what a similar private-sector worker receives. Adding in the value of non-cash benefits raises the federal compensation premium to between 30 percent and 40 percent a year.[8]

Unions have also successfully raised the pay of state and local government employees. While their hourly wages are no higher—and in some cases slightly lower—than those of similar private-sector workers, they make up for it with benefits. Specific benefit packages vary across states, but state and local employees generally have excellent health coverage to which they contribute little. They also receive generous pensions unavailable to most private-sector employees. Many state and local government employees can retire in their 50s with a substantial defined-benefit pension.

In California, state employees can retire at 55 with a pension worth 2 percent of their highest year’s earnings multiplied by their years of service. California highway patrol officers get an even better deal; they can retire at 50 with 3 percent of their final salary multiplied by their years of service.[9] That means that a worker with 30 years of experience can retire in his 50s and enjoy 90 percent of what he earned on the job until he dies. Including the value of these benefits, state and local employees’ total compensation is significantly higher than that of private-sector workers.[10]

Government Job Security. Government unions have won another perk for their members that few workers in the private sector enjoy: extremely high job security. Federal law makes termination of ineffective government employees extremely difficult.[11] Many states have similar civil service codes that make it difficult to fire underperforming government workers. The Chicago Teachers Union, for example, filed a lawsuit after the Chicago public school system responded to budget cuts by laying off teachers with “unsatisfactory” performance ratings.[12] The union insists that all layoffs must occur on the basis of seniority, not performance.

Government employees also have less reason to worry about elimination of their jobs during a recession. Since the start of this current recession in December 2007, private-sector employment has fallen by 6.8 percent. Federal employment, however, has risen by 10 percent while state and local government employment has only fallen slightly. Taxes and deficit spending have kept government payrolls going even as the economy has experienced its worst slump since the Great Depression. Government employees generally experience little of the uncertainty of a recession.

Since the Recession, Private Employment Tumbled and Federal Employment Grew

Government Pay Costs Taxpayers. The cost for such generous pay and benefits is great. Paying federal employees’ inflated compensation will cost taxpayers $47 billion in 2011.[13] Nonpartisan estimates indicate that state and local retiree health care and pension plans face a cumulative $3.1 trillion funding shortfall.[14] The money to cover these costs comes from taxes. The more taxes the government collects the more employees it can hire and the more it can pay them. Since most union members work for the government, unions strongly support higher taxes. The federal pay premium alone takes up 5 percent of federal income tax revenues.[15]

Government Unions Campaign for Tax Increases. The union movement now consists primarily of government employees lobbying for more government and higher taxes. An examination of union activity across the country illustrates the union movement’s strong advocacy for tax increases:
  • Arizona . Public-sector unions spent more than $200,000 to campaign for a successful ballot measure in May 2010 that raised the state sales tax by 1 percent.[16] The Arizona Education Association also successfully lobbied against a repeal of a $250-million-a-year statewide property tax in 2009.[17]
  • California . The California Teachers Association spent $2 million gathering signatures for an initiative on the November 2010 ballot that would raise business taxes by $2 billion a year.[18] Separately, public employee unions protested at the state capitol demanding the legislature raise taxes by $40 billion a year, including raising the top state income tax bracket to 11 percent, applying the sales tax to services in addition to goods, and increasing the state’s vehicle license fee by 2 percentage points.[19]
  • Colorado . Led by the National Education Association’s $450,000 contribution, government unions spent $806,000 campaigning for a failed 2008 ballot initiative to roll back taxpayer rebates and use that money to increase education spending.[20] That year, government labor unions also gave $244,000 to a committee campaigning for Amendment 58, an initiative that would have raised taxes on oil and natural gas companies had the voters not defeated it.[21]
  • Delaware . Democratic Governor Jack Merkle proposed closing the state’s budget gap in 2009 with an 8 percent across-the-board cut in state employee pay. In response, labor unions united in a large coalition (State Workers United for a Better Delaware) to oppose the pay reductions. The coalition pressed the governor to look to tax increases instead of cutting government union members’ pay.[22] The legislature ultimately cut state employee pay by 2.5 percent.
  • Florida . The Florida Education Association unsuccessfully lobbied for a 1 percent increase in the state sales tax in 2009.[23] Labor unions also spent $1.3 million in an unsuccessful attempt to defeat a 2008 ballot initiative that expanded the state’s property tax exemption.[24]
  • Georgia . The Georgia Association of Educators, the state-level affiliate of the National Education Association, has begun campaigning for a 0.5 percent increase in the state sales tax.[25]
  • Hawaii . The Hawaii State Teachers Association is campaigning for a $500 million annual hike in state taxes, including increasing the top state income tax to 13 percent and raising business and capital gains taxes.[26]
  • Idaho . Government labor unions spent more than $2 million promoting an unsuccessful ballot initiative in 2006 that would have raised the state sales tax by 1 percent and directed that money to public education.[27]
  • Illinois . AFSCME Council 31 and other government unions are pressing the state legislature to close the deficit with a $6.4 billion tax increase instead of cutting spending. The unions want state lawmakers to increase the state income tax from 3 percent to 5 percent and to expand the sales tax to cover certain commercial services.[28] The unions spent heavily in 2009 on television and radio ads pressing for these tax increases. In April 2010, government unions organized rallies outside the state capitol shouting, “Raise my taxes! Raise my taxes! Raise my taxes!”[29] At that rally, a government union member was caught on camera chanting, “Where’s the money?” and “Give up the bucks!”[30] In July 2010, 40,000 unionized state government employees received a 7 percent raise and are scheduled to receive another 7 percent raise in 2011. These raises will cost Illinois taxpayers $500 million.[31]
  • Iowa . In 2009, AFSCME Council 61 unsuccessfully fought for tax increases instead of requiring state employees to take a five-day furlough. In the eyes of the union’s president, the state’s deficit “is not a spending issue, this is a revenue issue.”[32]
  • Kansas . The Kansas Organization of State Employees boasts that it “mobilized more than 300 activists for a Lobby Day in February and formed ‘gauntlets’ outside each chamber in order to prevent spending cuts that would have eliminated 1,000 government jobs, urging wavering legislators to stand with them. They were relentless and creative—flooding House and Senate offices with hundreds of phone calls, faxes and e-mails, and utilizing social media to provide Twitter updates and action alerts.” They were successful. In May 2010, the Kansas legislature passed a budget that raised the state sales tax by 1 percent. The budget also raised the pay of many state employees between 2 percent and 10 percent.[33]
  • Maine . Maine citizens voted on a ballot initiative in November 2009 that would prevent government spending from growing faster than the combined rate of inflation and population growth and would require the government to return excess revenues as tax rebates. The Maine Municipal Association, the SEIU, the Teamsters, and the Maine Education Association collectively spent hundreds of thousands of dollars to campaign against the initiative, and it was ultimately defeated by a wide margin.[34] In 2010, government unions lobbied state legislatures to raise the state sales tax by 1 percent, or the state cigarette tax by $0.50 per pack.[35]
  • Maryland . Maryland added four new state income tax brackets in 2008. That was not enough for government labor unions. The state affiliate of AFSCME lobbied the legislature to raise taxes by another $2 billion, including expanding the state sales tax to cover additional services and increasing alcohol and gas taxes.[36]
  • Michigan . Government unions, including members of the AFL–CIO, the Michigan Education Association, and the Michigan Nurses Association launched “A Better Michigan Future” campaign in September 2009. They called for a $2.7 billion tax increase. Their proposals included expanding the state sales tax to cover a variety of services, and raising the top state income tax rate from 4.35 percent to 6.9 percent. The Michigan legislature decided against raising taxes in a state badly hit by the recession.
  • Minnesota . AFSCME Council 5 unsuccessfully lobbied state legislators to override Governor Tim Pawlenty’s veto of a $1 billion tax increase in spring 2009.[37] In December 2009 Council 5 lobbied for a $3.8 billion tax increase.[38]
  • Montana . The Montana Education Association– Montana Federation of Teachers (MEA–MFT) union openly portrays itself as a supporter of tax-and-spend politics. As MEA–MFT president Eric Feaver boasted, “Were it not for us almost any one of the…anti-tax-and-spend ballot issues proposed in the last 25 years would have passed.”[39] The union pursued tax-and-spend politics in 2009, unsuccessfully lobbying the state legislature to raise taxes on oil and gas companies.[40] The MEA–MFT also lobbied the legislature for a 6 percent raise for state workers. Despite the recession, it did not come away completely empty-handed. The final plan boosted government employee compensation, although not as much as the union wanted. As the union put it, “the pay plan amounts to $24 million in new money for state employees, and that’s no small change at a time when the economy is crashing.”[41]
  • Nebraska . Labor unions contributed 60 percent of the $2.5 million spent in 2006 to defeat Nebraska Measure 423. The ballot initiative drew the fire of government unions because it would have capped state spending based on population growth and inflation.[42]
  • New Jersey . Newly elected Governor Chris Christie took office in 2010 facing an $11 billion budget deficit. He closed the deficit without raising taxes by reducing spending. This drew the fire of government unions in New Jersey, especially the New Jersey Education Association, which opposed the governor’s proposal to freeze teacher pay and require teachers to contribute 1.5 percent of their salary toward their health insurance premiums. Up to then they contributed nothing. The union spent heavily on television, radio, and print advertisements critical of the governor.[43] Public-sector unions in New Jersey also fought to keep the state’s top income tax from falling to 9 percent from 10.75 percent and against a proposed cap on property tax increases. The leadership of Communication Workers of America (CWA) District 1—a union representing 40,000 state workers—proposed raising member dues to fund a $2 million advertising campaign against Christie. Union membership, however, voted against the proposal by 62 percent to 38 percent.[44]
  • New Mexico . The New Mexico AFSCME local lobbied the state’s legislature to raise taxes to deal with its budget deficit.[45] The union got its wish, but it was not the wealthy who paid. The legislature increased the state’s gross receipts tax on goods and services and reinstated a 2 percent sales tax on food.[46]
  • New York . New York government unions spent millions of dollars in 2009 on television ads opposing Governor David Paterson’s property tax cap plan and attacking his budget that did not contain the tax increases they wanted.[47] After heavy lobbying, the governor finally agreed to raise taxes to help close the budget shortfall. Among other tax increases, he raised the state’s top income tax rate to 9 percent and the combined state and New York City income tax to 12.85 percent.[48] Unionized employees at the Metropolitan Transit Authority were not complaining: more than 8,000 of them made over $100,000 in 2009, including one recently retired rail conductor who pulled in $239,000 in his final year on the job.[49]
  • North Dakota . Government unions, including the National Education Association and the North Dakota Public Employees Association spent $500,000 to defeat two ballot initiatives in 2008. One would have reduced the state’s income tax by 50 percent; the second would have established a trust fund for oil and gas tax revenues.[50]
  • Ohio. SEIU District 1199 produced and ran advertisements campaigning for a rollback of scheduled income tax cuts. They wanted taxes to remain higher to prevent government spending cuts.[51] In Columbus, AFSCME pushed a referendum on a 0.5 percent increase in the city income tax to victory. The union boasted that “members of Locals 1632 and 2191 stepped up to the plate, helping to make thousands of phone calls to potential voters and delivering 5,000 door hangers to homes in high-turnout Democratic precincts.… The efforts of Council 8 members proved essential: Out of more than 89,000 votes cast in last summer’s special election, the tax increase passed with a margin of just 3,050 votes.”[52]
  • Oklahoma. The Oklahoma Education Association placed Question 744 on the November 2010 ballot. The measure would increase spending on public schools by $1 billion, necessitating tax increases or spending cuts elsewhere to balance the state’s budget.[53]
  • Oregon. Public-sector unions provided over 80 percent of the $8 million spent to pass Measures 66 and 67 in January 2010, ballot initiatives that raised income and business taxes by $727 million.[54] Government unions outspent the business community by a three-to-two margin to pass the new taxes.[55] However the tax increases have not solved the state’s budget crisis. State budget analysts have estimated that the state still faces a $577 million shortfall.[56]
  • Pennsylvania. Unions representing 1.1 million Pennsylvania workers have created the Coalition for Labor Engagement and Accountable Revenues (CLEAR). The union coalition wants Pennsylvania lawmakers to “find new fair and equitable revenue sources to fill the state’s budget gap and not close the gap by cutting services.” The coalition particularly warns that the state should not furlough government employees, privatize their jobs, or reduce the retirement benefits of state employees.[57]
Unions consistently press for higher taxes and more government spending across America. The labor movement has made higher taxes and more government spending one of its top priorities. But unions are self-interested advocates of tax increases: They oppose tax increases that significantly affect their members. During the congressional debate over health care reform, for example, the union movement lobbied heavily against taxing high-value health care plans. Union members tend to have generous health coverage, and that tax would fall heavily on them. That is especially true of government union members. The union movement threatened to oppose the entire health care bill unless Congress scaled back that tax increase. Congress did so.

Conflict of Interest. Labor unions’ political activism creates a conflict of interest in government. In the private sector, employer pressure to cut costs balances excessive union wage demands. In the government, unions can use their political influence to elect sympathetic politicians, and then labor and management work together to raise government pay. No one at the bargaining table speaks for the taxpayers.

Departure from Labor’s Roots 
This shift to government has brought the union movement far from its historical roots. The 19th-century founders of the U.S. labor movement believed that the profit motive would lead employers to exploit workers. They saw unions as a vehicle to get workers a greater share of the profits that they helped to create.[58] The economic tool they used to do this was the strike.

However, this model does not apply in government. The state does not earn profits that it divides between shareholders and labor. For the same reason, the government has no incentive to pay low wages. A strike by government workers would interrupt vital functions such as police protection and education. Consequently, the founders of the labor movement did not believe the union movement had a place in government and they did not attempt to organize government workers.

Some labor leaders rejected government unions as intrinsically undemocratic. Collective bargaining gives government employees the power to tell voters how to spend their tax dollars instead of the other way around. As recently as 1959, the AFL–CIO Executive Council stated that “government workers have no right [to collectively bargain] beyond the authority to petition Congress—a right available to every citizen.”[59]
Rise of Private-Sector Unions. When Congress passed the National Labor Relations Act in 1935 to encourage collective bargaining, the NLRA did not apply to government employees. Union leaders at the time believed this made perfect sense. As former AFL–CIO president George Meany wrote in 1955, “it is impossible to bargain collectively with the government.”[60] The man who created the AFL–CIO would not recognize today’s union movement.

Only a small portion of workers belonged to unions until Congress passed the NLRA. The act promoted collective bargaining in the private sector by requiring management to bargain with unions as workers’ “exclusive bargaining representative.” Once the Supreme Court upheld the constitutionality of the NLRA in 1937, union membership grew rapidly. By 1947, 24 percent of the labor force belonged to unions.[61]
This gave labor unions great economic power, but they did not always use it responsibly. The United Mine Workers aroused national outrage when they shut down coal production in 1943, harming the war effort. Postwar strikes in the steel, coal, and auto industries paralyzed large portions of the economy. Congressional investigations also uncovered ties between major unions and organized crime.

These actions caused public support for unions to cool, and Congress passed the Taft–Hartley Act in 1947 to address union abuses. When Congress passed the NLRA 12 years earlier, it had not foreseen that some unions would pressure workers into unionizing. Taft–Hartley complemented the NLRA’s protection of the ability to bargain collectively by protecting workers’ rights to choose not to do so. The act established the secret ballot as the normal means of unionizing, gave workers the right to decertify their union, and prohibited many forms of economic pressure that unions applied to workers who did not want to unionize.[62]

Chart 3 shows union membership as a percentage of the labor force from two separate data sets collected by the Department of Labor.[63] Union membership peaked at 26 percent of the labor force in 1953, and has gradually declined since then.

Union Membership as Percentage of Labor Force

Creation of Government Unions. Wisconsin became the first state to pass a law permitting government employees to collectively bargain in 1959. This followed the decision of New York City’s Mayor Robert Wagner to do the same in 1958.[64] In 1962, President John F. Kennedy signed Executive Order 10988 that permitted collective bargaining with federal employees.

Throughout the 1960s and the 1970s, collective bargaining rapidly spread throughout state and local governments. To prevent public-sector strikes, most states established binding arbitration for government unions. These laws vary across states, but under binding arbitration, contract disputes between the government and government unions are decided by an arbitrator who hands down a binding contract.

Competition Eroded Private-Sector Unions. At the same time that unions were rapidly organizing government workers, market competition began undermining unions in the private sector. Unions raise business costs.[65] This, and the fact that unionized companies invest less in capital and research and development, makes unionized firms less competitive.[66] This does not hurt unions if their competitors are unionized or they compete in heavily regulated markets.

But in the 1970s and 1980s, Congress made the U.S. economy much more competitive. Deregulation and free trade forced many unionized firms to compete against more efficient non-union firms. They could not keep up. Non-union businesses charged less than unionized firms and won their customers.

Across the country non-union manufacturing, construction, and trucking companies grew while their unionized competitors shrank. Between 1973 and 1998, non-union jobs grew by roughly 3 percent a year while 3 percent of union jobs disappeared annually.[67] Competitive pressures have steadily shrunk private-sector unions to their current levels: 7 percent of all private-sector workers and 6 percent of the private-sector labor force.

Public-Sector Union Workers Outnumber Private-Sector Union Workers

Government Unions Immune to Competition. Competitive forces have not undercut government unions: The government has no competition. It has a monopoly on providing its services. Taxpayers cannot purchase less expensive police or education services from another state without moving there.

Consequently, government unions can negotiate generous benefits without worrying about putting their jobs at risk. Unlike the private sector, governments almost never go bankrupt. They can always raise taxes to cover their costs. So once unions organize a government department, those workers remain organized.
By 1977, a total of 35 states had passed legislation regulating collective bargaining with state employees.[68]

That year, 33 percent of government employees belonged to unions, which accounted for 26 percent of all U.S. union members. Since then, government union rates have stayed in the mid to high 30 percent range.[69] Even as private-sector unions have lost members, public-sector unions have grown. In 2009, those paths crossed and now most union members work for the government.

What Congress Should Do
The union movement has transformed over the past generation; it now primarily represents government employees. Three times as many union members now work for the U.S. Postal Service as for the auto industry. The mandatory union dues that the government collects on behalf of its unionized employees raise billions of dollars a year. The union movement spends a substantial amount of this money aggressively advocating higher taxes and increased government spending.

This creates a situation in which both government labor and management have an incentive to promote higher taxes. Congress should take several steps to restore equity between government employees and taxpayers:
  1. Congress should recognize that the union call for raising taxes to pay for more and more highly paid government employees is narrowly self-interested. Congress should reject union lobbying for tax increases. Every major school of economic thought agrees that the government should not raise taxes during a recession. Congress should not raise taxes to insulate unionized government employees from the recession.
  2. Congress should reduce the pay of federal employees to market rates. Congress can do so by adopting performance pay based on market signals of labor demand, hiring more contractors, and reducing the generosity of federal employee benefits. This would save taxpayers $47 billion in 2011.[70]
  3. Congress should not force states that do not collectively bargain to begin doing so. Legislation currently before Congress, the Public Safety Employer–Employee Cooperation Act of 2009 (H.R. 413, S. 3194), would require all states and local governments to collectively bargain with police and firefighters. Congress should respect the decisions of states that find government unionism counterproductive.
  4. Congress should stop requiring taxpayers to subsidize the collection of government union dues. The federal government uses its payroll system to automatically deduct the dues of federal union members from their paychecks. Federal unions use these dues to lobby for higher taxes. Unions should use their own resources to collect dues from their members. Congress should end the automatic deduction of federal union dues.
Congress should adapt the law to appropriately respond to the reality of the new government union movement. It is the right thing to do.

James Sherk is Senior Policy Analyst in Labor Economics in the Center for Data Analysis at The Heritage Foundation.

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