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Economic Outlook: Rethinking Public Pension Negotiation

Original article:

Bryan Jeffries, the chief of Arizona’s firefighters’ association, has been arguing to anyone who will listen that his members — and the state’s police officers, too — should volunteer to cut their own pension benefits.

Mr. Jeffries, a fourth-generation Arizonan who has been a firefighter and a city councilor, says that emergency workers have a special obligation to protect the public not only from physical peril, but also from financial ruin. Cutting pensions for firefighters and police officers would help save their woefully underfunded retirement plan and bail out towns and cities that are struggling to keep up with their mandated contributions, he says.

“It is critical for our state, for the taxpayers and for the next generation that will be here long after we are gone, that we repair this,” said Mr. Jeffries, whose group, the Professional Fire Fighters of Arizona, is not a union but works on political issues relevant to its membership. “I know intellectually that with these ballooning payments, I feel a direct conflict with the oath I took to protect the citizens.”

His unusual proposal has been a touchy subject for many of the people whose pensions would be cut, because defined benefit pension plans are viewed as compensation for doing dangerous work and a lure to recruit new public servants. And despite the growing shortfall in the statewide pension plan that has put stress on cities and towns, which must make up the difference, politicians have been nevertheless wary of attacking these benefits, for fear of alienating two powerful constituencies and to sidestep questions about why they lavished such generous pensions on them in the first place.

“When you see policemen and firemen putting their lives on the line, you want to make sure that when they retire, they receive a reasonable retirement,” said Jeff Dial, a Republican state representative from the Phoenix area who supports the firefighters’ initiative.

The growing unfunded liabilities have forced cities and towns to pick up the tab. Tucson, for instance, contributes the equivalent of 51 percent of its emergency workers’ wages, up from about 11 percent a decade ago. That means if a firefighter’s salary is $60,000, Tucson must pay about $30,000 more toward his pension. For most police officers and firefighters, pensions make up the bulk of their retirement income, because they do not collect Social Security.

Joe Clure, the president of the Phoenix Law Enforcement Association, which represents 2,400 police officers, has worked with the firefighters on their initiative, but is wary of moving too hastily. “What you worry about is it opening Pandora’s box and making all sorts of changes,” Mr. Clure said. “We are offering up our own haircut.”

Fueling the resentment are reports of public servants who retire with six-digit pensions by exploiting rules that let them cash in unused vacation and sick days. Sal DiCiccio, a Phoenix councilman who favors giving new city employees 401(k) plans, published a list of the 50 highest pensions for retired city public employees.

“The whole system has been gamed by everyone,” Mr. DiCiccio said. “I’m supportive of pensions for police and fire, but people don’t expect that” kind of abuse.

While the most egregious cases make headlines, most pensions for emergency workers are modest. The average pension for a staff member (not including those on disability or paid to survivors) is $52,600, assuming they worked 23.6 years and were 51.3 years old when they retired, according to the pension fund administrator.

What is the purpose of a public pension? It should, when functioning properly, provide income security to men and women who dedicate their lives to careers in public service. It should not be an avenue to a lavish retirement, but rather a comfortable retirement in line with the spirit of public service. Municipalities should consider a hard ceiling on public pensions, so that those who wish to “game the system” are unable to make the 6 figure pensions that generate ire towards reasonable pensions (note, $100,000 is by no means a magic threshold; it is certainly possible to imagine a future in which a 6 figure pension is perfectly reasonable).

Pensions should also be stable, and should not be subject to “haircuts” every-time funds are invested poorly or government tax revenues fall. This calls into question the pension negotiation process. Generally union leaders try to maximize the benefits their constituents receive. The problem is that often times politicians are all to happy to acquiesce, hoping to garner support by appearing to be pro-public service. Funding shortages likely will not surface for years or decades later, by that time the politician who approved the plan will be long gone.

This time inconsistency is unfortunately inherent in public contracts (for example, subsidizing private corporate operations). Therefore, all proposed public pension plans should be scrutinized by independent commissions and opened for public comment, to ensure that they are reasonable. Similarly, since taxpayer money often acts as a backstop to shortfalls in pension fund, investment decisions should be subject to scrutiny from both independent investment professionals and the general public.

There is also an element of responsibility for union negotiators. It is unfair to ask people to work under certain conditions, only to have those conditions changed after the fact. Union negotiators could try to trade some of the benefits their constituents are due to receive in exchange for iron-clad agreements that agreed upon pensions will, under no circumstances, be reduced. The problem is that such clauses often already exist in many state constitutions, so an even stronger guarantee may be difficult to craft. Perhaps by doubling-up on the issue, having it both in the Union contract as well as the state constitution, such a trade-off can be made in good faith.

As municipal bankruptcies become a more prominent issue in American politics, public pensions will naturally come under closer scrutiny. Future negotiations should bare this in mind, and try to reconcile the legitimate needs of public servants with the larger responsibilities of taxpayer dollars.

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Economic Outlook: In Chattanooga VW Union Vote, It’s One Version of “Business As Usual” vs. Another

German automaker Volkswagen AG, in a brief but bluntly worded statement on Thursday, said a vote this week on union representation at its Chattanooga, Tennessee, plant would have no bearing on whether it will build a new crossover vehicle there.

The statement was contrary to U.S. Senator Bob Corker’s announcement on Wednesday that he had been “assured” that if workers at the factory reject United Auto Worker representation, the company would reward the plant with a new product to build.

Bob Corker:  “I’ve had conversations today and based on those am assured that should the workers vote against the UAW, Volkswagen will announce in the coming weeks that it will manufacture its new mid-size SUV here in Chattanooga,” Corker said on Wednesday

A spokeswoman for Corker did not respond when asked whether the senator also meant that a vote for the UAW would mean that the plant would not get the new product, which could create an estimated 1,500 new jobs.

National Labor Relations Board expert Kenneth G. Dau-Schmidt, who is professor of labor at the University of Indiana-Bloomington, said Corker was trying to intimidate workers into voting against the union.

“I’m really kind of shocked at Corker’s statement,” said Dau-Schmidt. “It’s so inconsistent with what VW has been saying and VW’s labor relations policy in general.”

Another labor expert, Harley Shaiken of the University of California-Berkeley, said, “The senator’s comments amount to economic intimidation that undermines the whole nature of union representation elections.”

Shaiken often advises UAW officials.

“If the senator’s statement doesn’t violate the letter of the law, it certainly violates the spirit of the law,” Shaiken said.

“There is no connection between our Chattanooga employees’ decision about whether to be represented by a union and the decision about where to build a new product for the U.S. market,” said Frank Fischer, chairman and chief executive officer of Volkswagen Chattanooga.

Earlier this week, Tennessee Republican lawmakers said if the UAW is voted into the Chattanooga plant, Volkswagen could lose millions of dollars in state incentives. In order to entice Volkswagen to build its new U.S. plant in Corker’s hometown of Chattanooga, the state gave it about $580 million in incentives.

“Tennessee’s battle over VW union vote has national implications”

If the workers at the VW plant do vote to unionize, they would adopt a German-style works council, the first of its kind in the U.S. Every VW factory worldwide, aside from the Chattanooga plant, has both union representation and a works council—making it an essential part of the VW culture.

Works councils, which are common in VW’s home country of Germany, are groups elected by the entire workforce that work with management on problem-solving and contribute to company-wide decision-making. Many German companies consider them to be a key component of high-quality manufacturing businesses. If Chattanooga workers vote not to unionize, they’ll be the only group of VW workers without direct say on matters such as the input on factory locations, work hours, vacation days and plant rules. 

Tennessee is a right-to-work state, which means that if Volkswagen workers do vote in the UAW, employees will still have the right to decide individually whether to join and financially support the elected union. Still, union membership has been sharply declining in most of the country–even Michigan–so a pro-union vote in Tennessee would signal a bit of a comeback for unions.

Last week, Chattanooga mayor Andy Burke told The New York Times, “Chattanooga has unique assets that allow us to grow economically. The same things that brought VW here — quality of life, a productive work force, wages that compare favorably to the rest of the country — those will still exist regardless of what happens with unionization.”

Frank Fischer, chairman and chief executive of Volkswagen Chattanooga released a statement last week asking that workers be allowed to make up their own minds. “Volkswagen Group of America and the U.A.W. have agreed to this common path for the election,” he said. “Volkswagen is committed to neutrality and calls upon all third parties to honor the principle of neutrality.” Perhaps the politicians should do the same thing, and trust these U.S. workers enough to make up their own mind.

This situation is largely similar to the Boeing case which recently resulted in Washington’s workers voting against their self-interests (privatization of pensions) in fear of losing their jobs. In both cases, we have a situation involving large public subsidies and union-busting, benefiting large corporate interests at the expense of average workers:

The story of Boeing is an example of how ruthlessly U.S. businesses use the needs of some workers to justify lowering the standards of others, to the ultimate detriment of both.

The deals aren’t only on the price of labor, but on the size of subsidies, which states and municipalities must fit into their budgets by either raising taxes or cutting services.

Unless American workers miraculously rediscover collective bargaining or begin to lay claims on the government to promise what organized labor once provided, then their lives will continue to be shaped by companies like Boeing. Their wages will be taken out of their pockets, their tax money out of their schools and roads, and once they retire, they will be left with nothing but a 401(k), waiting for the next stock market crash.

There is one disturbing difference between the Boeing and VW example. In the case of the UAW, it is not even the company itself advocating against union membership. In fact, as discussed above, unions and workers-councils are part of VW corporate culture:

Unionization efforts typically face strong opposition from employers, but in this case VW has remained neutral, with criticism coming mainly from conservative politicians and anti-union third-party groups like National Right to Work, a Koch Brothers-funded group.

Large subsidies, aside from their explicit cost to taxpayers, implicitly give private corporations leverage over unions. Since subsidies are generally not tied to any long-term obligation from the company receiving them, that company can pit tax-payers against unions. This is exactly what happened in the Boeing situation:

In November, Boeing announced another new expansion project that concerned the construction of their newest planes, and the Washington State legislature granted the company the largest tax subsidy in the nation’s history to get them to stick around. Then, Boeing approached workers halfway through their contract extension and offered them a deal: Cut your retirement or we won’t make our newest plane in your town; refuse to back down and the taxpayers of Puget Sound can blame you for wasting their $8.7 billion.

In the rare case of a company that believes in workers rights and employee ownership of the production process (as VW does), subsidies give lawmakers leverage over workers. Vote down union membership, or we will withhold the subsidy. This would drive up the companies cost significantly more than just union membership itself, potentially forcing the company to relocate. Such actions serves the lawmakers ideological stance–they can say “look, unionization chased the jobs away”.

Either way, the subsidies are a corrupting and market distorting mechanism. Chattanooga Mayor Andy Burke has it right–let a municipality stand on its merits when attempting to woo a potential employer. It should be made illegal for municipalities to offer subsidies to employers; if a company wished to do business in America, it should be because of our skilled workforce and large consumption base, not because of some “race-to-the-bottom” or a short-sighted subsidy. A global carbon-tax would complement such a policy nicely; by making it more expensive to ship goods from abroad into America, America itself would become a more attractive manufacturing site.

Update: The Chattanooga VW workers voted down UAW membership last Friday, 712-626. While the future site of production for VW’s new crossover remains uncertain, VW does not seem pleased with political meddling in workers affairs, stating such actions may compromise future VW partnerships in America’s south:

“I can imagine fairly well that another VW factory in the United States, provided that one more should still be set up there, does not necessarily have to be assigned to the south again,” said Bernd Osterloh, head of VW’s works council. 

“The conservatives stirred up massive, anti-union sentiments,” Osterloh said. “It’s possible that the conclusion will be drawn that this interference amounted to unfair labor praxis.”

Well done Sen. Corker!