Labor Day Blues

The local radio news this evening was a series of whine sessions from union labor. With one exception (hotel and restaurant workers), the whiners were all public sector union locals. This is not surprising, because the labor unions have destroyed pretty much every industry where they have been able to organize most of the labor force and so most union workers are in government now. The unionized airlines (euphemistically called the “legacy” airlines) are currently in their death throes, victims of excessive labor costs, unreasonable work rules and poor service from undisciplined workers. The big three auto makers are probably next.

But is government immune from destruction, as the unions seem to think? Certainly the normal disciplines of profit and customer choice don’t apply. But there are still limits. Politicians have given in at every turn to aggressive public sector unions. While pay has been generous ($150K firefighters are common, with regular overtime – standard time is 12 days/month), the commitment to retirement and health benefits is staggering. Typical deal is 3% of salary per year of service, to a maximum of 30, out anytime after age 50. Fully paid health insurance, of course. Most of these commitments were made when it appeared to the politicians that 30% a year was a minimum return that the stock market would yield, forever. So they could afford it. Unfortunately, the return is going to be a lot less than that. The budget bite has already started, but the stark reality is that many municipalities and agencies will be effectively bankrupted by these commitments. What happens then? I’m sure I don’t know, but it is a huge ticking time bomb.

P.S. Just by concidence, the following showed up the day after writing this note: Sunny San Diego Finds Itself Being Viewed as a Kind of Enron-by-the-Sea (New York Times; registration required).”…The prospectus did not mention that the city had for years been shortchanging its public pension fund, leading to an unfunded liability of more than $1.15 billion, or that the city owed nearly $1 billion more in health care benefits to retirees and did not have the money….hundreds of other public and private pension systems were suffering problems similar to San Diego’s because of the stock market and the rising cost of benefits….Among the chief causes of the long-term instability of the city’s employee retirement fund was a pair of decisions in 2002 to add benefits for future retirees while reducing the city’s annual contribution to the funds. Among the most costly was a program called a deferred retirement option plan, or DROP, which allows a worker to defer retirement and build up a special account earning 8 percent interest and a 2 percent annual cost-of-living adjustment. Such programs have touched off investigations in Philadelphia, Houston and Milwaukee.

That action prompted an impassioned warning from Ms. Shipione, who was one of only 2 of 13 members of the San Diego City Employees’ Retirement System board to vote against the plan. She said that DROP would entitle a worker earning an average of $50,000 to collect a lump sum of more than $300,000 at retirement, along with all his or her other benefits. A higher-paid employee could walk away with close to $1 million.”

DROP was invented so that workers didn’t leave as soon as they were eligible to retire – since they were going to be paid essentially the same whether they came into work or not, the theory was that it was cheaper to pay them an incentive to keep working rather than taking on another employee (with the concomitant benefit obligations, of course) to replace them. In a perverse sort of way, it is not unreasonable. However, it does mean that many municipal employees can retire as multi-millionaires if you add up the present values of their various plans.

The $366 billion outrage

Perhaps the public sector aristocracy should be a little careful. There have been tax revolutions here before, you know.

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