Shadowbosses: Government Unions Control America and Rob Taxpayers Blind

by Mallory Factor

  Income for Life

  And there is even more bad news. Government employees are extra burdensome for taxpayers because they retire earlier than other Americans. Early retirement is a union creation—and makes no fiscal sense. Retiring government employees early places a huge burden on the next generation of taxpayers.

  Government employees are extra burdensome for taxpayers because they retire earlier than other Americans. Early retirement is a union creation—and makes no fiscal sense.

  For example, in New York City, “firefighters and police officers may retire after 20 years of service at half pay—which means that, at a time when life expectancy is nearly 80 years, New York City is paying benefits to 10,000 retired cops who are less than 50 years old,” notes labor analyst Daniel DiSalvo. That’s twenty years of work for thirty years of retirement income.50

  The unions love these early retirement schemes. Why? Because for every retiree, there’s a new hire. Which means that both the retiree and the new hire have to pay dues to the union. It’s two for the price of one for the government employee unions—and one for the price of two for the taxpayers. Of course, retirees pay less union dues than active members do, but they still do pay some dues and fees to the union. Plus, by substituting a new worker for an old worker, the union gets a longer payout—the new employee has his whole government career ahead of him during which he will pay the union dues. It is a great scheme for the union to guarantee its future income stream.

  As virtually everyone recognizes at this point, pensions have destroyed full-fledged industries like the American auto industry. General Motors drove itself into bankruptcy because it had triple the number of retirees and widows as actual workers. GM provides one million people with health-care coverage, but has less than 100,000 people working for it. As Mark Steyn writes, “How do you make that math add up? Not by selling cars: Honda and Nissan were making a pretax operating profit per vehicle of around $1,600; Ford, Chrysler, and GM a loss of $500 to $1,500. That’s to say, they lose money on every vehicle they sell.”51

  The U.S. car manufacturers are no longer car companies—they are pension companies. Our government will soon be a pension company itself as a greater and greater percentage of state and local revenue goes to pay for retirees instead of active government workers. And ultimately, being a pension company will even prove unsustainable for our government. The cost of paying for retired government workers with rich union-negotiated pensions ultimately will be too much for the taxpayers to bear.

  Extreme Pensions in California

  California has the notorious, budget-busting “3% at 50” scheme. At first, this deal allowed only California Highway Patrol officers to retire at 50 and a full pension based on 3 percent of their final year’s pay times the number of years worked. For example, an officer hired at 20 years old and retiring after 30 years on the job gets a pension equal to 3 percent times 30 years, or 90 percent of his final year’s pay, which is later indexed for inflation. Sweet deal for police officers, right? Then, the California Legislature authorized cities, counties, and school districts to negotiate the same deal for their employees.52

  This is usually the way this works—once one group of government employees gets a benefit, government employee unions demand the same benefit for other groups of workers, even though being a policeman is more demanding and dangerous than being an office worker. And extending the greatest possible benefits to the greatest number of government employees drives up costs exponentially.

  Largely as a result of the “3% at 50” system, California’s pension costs increased by an astonishing 2,000 percent from 1999 to 2009. You read that statistic right—it’s a two followed by three zeroes.

  There is a basic immorality to this system. It is worth asking yourself how it became your job to pay for somebody else’s generous retirement when you’re having a hard enough time saving for your own.

  The Vault Is Empty

  And then the worst problem of all—unfunded pension liabilities. In addition to very high current pension contributions that strap state and local budgets, there is a much worse problem on the horizon. States and municipalities have promised their workers pension and retiree health-care benefits that there is almost no way that the government will be able to pay.

  In addition to very high current pension contributions that strap state and local budgets, there is a much worse problem on the horizon. States and municipalities have promised their workers pension and retiree health-care benefits that there is almost no way that the government will be able to pay.

  Of course, the lightly unionized Free states don’t necessarily have any better policies when it comes to underfunding their future pension and health-care obligations than the highly unionized Union states. But the Union states will have greater future obligations because of bloated union-negotiated pensions and retiree benefits.

  The contributions that governments have made each year to pay for these future pensions are simply not great enough to cover the future costs of these pensions. So, in future years, states will have to make astronomical payments out of their general treasuries to make up for these shortfalls.

  Imagine that instead of saving what you need for retirement, you take half that money that you should put in your retirement account and try your hand at the slot machines. Your plan? Either you will win the jackpot, or your only son will make a whole lot of money and support you in your old age. It is such a good plan that you realize you can cut back your contributions to your retirement account further, and spend even more on the slot machines. The only looming problem is that you haven’t hit the jackpot yet, and you sense your son is having a hard time getting the lucrative job that you are counting on.

  Just like you counting on a jackpot or your son’s future earnings to make up for your retirement savings shortfall, the states are betting that a raging bull market will solve their shortfall problem. If the bull market fails to materialize, though, future taxpayers will have to make up the shortfall.

  Most government employee pensions across the country are underfunded, meaning that in future years, taxpayers will have to make up the shortfall in order to pay out pensions to all those government workers who are counting on receiving them. Government officials have given in to union demands for greater pensions without anyone figuring out how to possibly pay for them. And anyway, future pension obligations don’t impact the current budget too much, so why not? After all, these government officials will be retired anyway by the time the bill comes due. By then, it will be somebody else’s problem.

  There are two components of states’ unfunded liabilities, both heavily affected by union-negotiated contracts. The first is the fixed pension amount that retirees have been promised, which we have discussed. The second is the future cost of retiree health care. When government workers retire early, the state provides full health-care coverage for them until Medicare kicks in (and even after that to some extent). With so many government workers retiring at fifty-five, fifty, or even earlier, these health-care costs are considerable. But nineteen states don’t put aside any money at all to pay these health-care costs, they just use a “pay as you go” plan and pay the health-care costs for the current year. But in future years, health-care costs and pensions will crowd out other important items in the state or local budget, like public safety and education. But again, that’s tomorrow’s problem.

  Unfunded state liabilities for health care and pensions amount to over $1.36 trillion, based on states’ own actuarial calculations.53 The only problem is that these gloomy calculations are too optimistic—because most states assume that they will earn an 8 percent annual return on their pension fund investments. Who can expect a return on their investments that high, especially without taking on risky investments? Not you and me, and not state pension funds, either. In reality, America’s state pensions earned under 4 percent annually from 2000 to 2010, about half the rate the actuaries use for their calculations.54 The U.S. Senate Finance Committee re
cently came out with a more realistic estimate of the unfunded state and local government pension obligations, finding that they may exceed $4 trillion.55

  When the government assumes overly rosy investment conditions—an 8 percent annual return—and bases pension policy on those conditions—sooner or later, the government will come looking for your wallet. It’s like buying your child a pony, assuming that your kid will go out and earn the $10,000 it takes a year to pay for food, medical care, and board for the pony. Your kid’s going to come up short, and you’re going to have to make up the difference. There’s no such thing as a free pony—or a free pension.

  Unfunded Liabilities in Union vs. Free States

  What do unions have to do with all this? Well, heavily unionized states give their government workers amazing pensions. Unionized government workers have pension benefits that are on average 68 percent higher than nonunionized government workers.56 So, the unfunded liability problem is much more problematic in the heavily unionized states, which have much larger obligations to their government employees in retirement than the Free states do.

  In New Jersey, for example, as Governor Chris Christie stated, pensions and benefits are “the major driver of our spending increases at all levels of government—state, county, municipal, and school board.” As Christie pointed out, the pension system isn’t just unaffordable. It’s a disaster area. He cited as an example a forty-nine-year-old retiree who had paid a grand total of $124,000 toward his retirement pension and health care, and was slated to receive $3.8 million in pension and health care—a 3,000 percent return on investment. Even Warren Buffett couldn’t earn those returns. In fact, Buffett himself wrote in a letter to his shareholders of his concern over unfunded pension liabilities: “In a world where people are living longer and inflation is certain, those promises will be anything but easy to keep.”57

  Because government workers, like all Americans, are now living longer and retiring earlier, we’re paying them forever. In California, a fifty-five-year-old male police officer or firefighter can expect to live until he is eighty-one, according to the California Public Employee Retirement System (CalPERS).58 Allowing public-safety officers (and many other classes of government workers) to retire at age fifty rather than age sixty increases the cost of their pensions by nearly 50 percent. And even worse, spending on retirees starts to crowd out needed spending—like on active-duty firefighters and police.

  Take a look at the magnitude of government worker union pension liabilities in the most heavily unionized states. To pay off the existing unfunded pension liability, Californians would have to pay $13,500 per person—which, of course, is never going to happen.59 The per capita income of Californians amounts to about $29,000 per person. So Californians would have to spend nearly half their income to pay this off.60 Illinois’s unfunded pension liability per person is over $17,230; New Jersey’s is $16,838 per person; Connecticut’s is $17,622; Rhode Island’s is over $20,271 per person.61

  By contrast, less unionized states have anywhere from one-half to one-third the pension liabilities per person—not good, but certainly better. The average per person unfunded pension liability for the Free states is $10,030.62 In short—any amount of government employee unionization is bad. The more you have, the worse it is.

  Perhaps the worst news is that the fiscal instability of our states is already affecting our nation’s credit rating. The unfunded pension liabilities at the federal, state, and local levels were one of the key factors when Standard & Poor’s downgraded the United States’ credit rating in August 2011.

  Perhaps the worst news is that the fiscal instability of our states is already affecting our nation’s credit rating. The unfunded pension liabilities at the federal, state, and local levels were one of the key factors when Standard & Poor’s downgraded the United States’ credit rating in August 2011.63 A recent Senate finance report explains the risk to the entire United States of unfunded pension liabilities: “The economy of California is nearly the size of Italy. Just as economic difficulties in Italy have stressed the European Union, fiscal problems in a large state such as California or Illinois could damage the fiscal health of the United States.”64 The problem created at the state and local levels affects all of us, wherever we live in the United States. We can’t expect just the states with the worst unfunded pension liabilities to default without the rest of us being adversely affected as well.

  The Great Migration

  Government employee unions are unintentionally reshaping the demographic map of the United States. Burdensome government and high taxes in the heavily unionized states is causing residents to flee the states run by the Shadowbosses for the states run by the people.

  It’s happening in New Jersey, which is one of the nation’s most unionized states. Overall, it’s got the worst state tax burden in the country.65 New Jersey has the top personal income tax rate, its corporate tax rates rank sixth nationally, and it has the highest property taxes. No wonder the wealthiest people in New Jersey work in waste management and evade taxes, or show their tans on Jersey Shore.

  As of 2008, New Jersey was losing approximately fifty thousand of its citizens a year to the other states. And while its citizens were fleeing in droves, the state of New Jersey was still increasing its number of government employees.66

  How then did then Democrat governor Jon Corzine respond to the dire news that his friends and neighbors were hightailing it for more hospitable climes? He accentuated the positive. Corzine drew attention to a Princeton University study that concluded that New Jersey was growing more prosperous relative to the rest of the nation, and that lower income people were leaving because it was just so darn affluent. (They didn’t make the same argument with regard to, say, Mexico.) The study actually concluded, “While New Jersey has, for a long time, experienced net domestic out-migration, this is not a symptom of economic decline in the state… Out-migration from New Jersey is a byproduct of prosperity, not decline.”67 All this is good news for New Jersey according to the study: “We suspect that in a very high density state such as New Jersey, population growth is more costly and difficult to manage than out-migration.”68 So then, the population decline is a blessing in disguise? Corzine himself said, “I welcome the findings from the Princeton Study… which detail what we’ve surmised all along—that people are not fleeing the state at the accelerated rates that some pundits would have us believe… What this study shows is that migration is a byproduct of prosperity and not tax policy.”69

  While undoubtedly many lower income New Jersey residents are being squeezed out by the state’s high housing prices and cost of living, other data seem to indicate that New Jersey is indeed suffering financially from hemorrhaging residents. U.S. Treasury Department data showed that from 2000 to 2008, over 1.4 million taxpayers and their dependents took off from the state. In the first year after leaving New Jersey, these households had an aggregate adjusted gross income (AGI) of more than $73,000 per individual or joint tax filer.70 In other words, the vast unwashed weren’t leaving New Jersey. The taxpayers were. Actual IRS data show that the average annual AGI for the taxpayers who moved into New Jersey was $1,800 lower than the average for those moving out. Over a nine-year period, then, New Jersey lost more than $13 billion in taxable income.

  Kirsten and Keith Cuillard are the kind of family leaving New Jersey. They were paying a property tax bill of an outrageous $11,500. Then, they moved to North Carolina. “I would have loved to have stayed in New Jersey,” Kirsten told the Asbury Park Press in 2009. “It’s just that the cost of living was killing us.” They bought a house twice the size of their New Jersey home, which cost nearly 30 percent less—and they’ll pay 72 percent less in property tax annually.71

  Just like in Jersey, Californians are leaving in droves, leaving for states that have no income tax, like Nevada and Texas. In fact, from July 1, 1990, through July 1, 2009, California lost a net total of roughly three and a half million residents as a consequence of out-migration to oth
er states.72 California’s no longer a magnet state—it’s a repelling state. Its residents are now heading for the borders.

  For the past two decades, California has been embroiled in a grim competition with New York for status as the number one loser of residents (in absolute terms) to other states.73 It’s not just individuals leaving. Whole businesses are fleeing. California’s increasing unattractiveness to middle-and working-class employees is a major factor in “encouraging their employers to move elsewhere.”74

  “In the relocation business, we’re seeing higher percentages of employees willing to uproot themselves and their families,” writes Joe Vranich of Fox & Hounds, a California business news website. In 2010 alone, Dr. Vranich was able to document 204 separate cases of companies either leaving California completely or building facilities in other states that normally would have been located in California. The vast majority of the cases he documented involve capital leaving California for the much less unionized states, the Free states of Texas, Arizona, Colorado, Utah, Virginia, North Carolina, and Georgia.75